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What to expect with the VantageScore 4.0 model
VantageScore recently announced a new version of its credit-scoring model, VantageScore 4.0. It keeps the 300- to 850-point range, but other changes could affect your credit score based on this model.
First, a credit score is simple in concept: It’s a number based on the information within your credit report that helps lenders determine the likelihood you won’t pay back your loans. A higher score means you’re more creditworthy and less likely to default or pay late.
However, creating a scoring model that can make accurate predictions is difficult. Over time, credit scoring models are updated to attempt to increase their accuracy.
VantageScore Solutions, an independently managed firm created by TransUnion, Experian and Equifax in 2006, just released the fourth version of its credit scoring model — VantageScore 4.0.
Upcoming changes in the new model
There are several major changes in the VantageScore 4.0 credit scoring model, like using trended data and potentially lowering the impact of tax liens and judgments.
VantageScore 4.0 vs. other scoring models
|Credit factor||VantageScore 4.0||VantageScore 3.0||FICO Score 8||FICO Score 9|
|Utilization rate||Very important||Very important||Very important||Very important|
|Historical utilization rate and payment info (trended data)||May affect your score||No impact||No impact||No impact|
|Collection accounts||Ignores paid collection accounts. Ignores medical collection accounts that are less than six months old. Weighs unpaid medical collection accounts less than other types of collection accounts||Ignores paid collection accounts||Ignores small-dollar “nuisance” accounts that had an original balance of less than $100. Treats medical collection accounts, including those with a zero balance, like other collection accounts||Ignores paid collection accounts. Weighs unpaid medical collections less than other types of collection accounts|
|A tax lien or judgement||Are less important than before, but can still have a significant impact||Can have a significant impact||Can have a significant impact||Can have a significant impact|
Changes in the way the new VantageScore scoring model works could affect your credit score — or, at least, one of your credit scores, since your scores can come from many different sources.
Companies compete to create and sell their credit scores. FICO and VantageScore are two major players in this industry. Some companies, such as banks or credit card issuers, may also create proprietary credit scoring models. Each scoring model could result in a slightly different score depending on how it weighs data and which of your credit reports it uses.
When will lenders start using VantageScore 4.0?
VantageScore 4.0 will be available to lenders this fall. However, it can take time and money to switch to a new model, and lenders may not immediately make the change. Some lenders also don’t use VantageScore credit scores. For example, Fannie Mae and Freddie Mac use FICO scores (often older versions of FICO scores) when underwriting mortgages.
The release of VantageScore 4.0 is particularly relevant to some consumers because it implements three major changes:
1. Trended data — your utilization rate starts to remember
According to VantageScore, trended credit data “reflect(s) patterns in borrower behavior”. These behaviors are generally tied to how you borrow and repay credit over time. This can include how your utilization rate (the amount of available credit that you use) trends over time.
So how is this different from other scoring models? For some credit-scoring models, your utilization rate doesn’t have a “memory.” In other words, credit scoring models generally consider your most recently reported utilization rate when calculating a credit score for you.
However, the new VantageScore model will incorporate up to two years’ worth of trended data into its credit scoring model. It’s the first tri-bureau credit scoring model to do so.
But what’s most important to remember is that practicing good credit habits, such as making full, on-time payments, remains strongly influential when it comes to your credit score, no matter what the model is.
Jeff Richardson, vice president of marketing and communications for VantageScore, says that “those who pay more than the minimum due on a mortgage, for example, may be particularly advantaged [by the new model].”
2. Tax liens, judgements and medical collection accounts won’t hurt as much
Starting July 1, 2017, TransUnion, Experian and Equifax will adopt stricter requirements for collecting and reporting consumers’ tax liens and civil judgments. As a result, these negative marks may drop off many consumers’ reports.
In anticipation of this change, VantageScore 4.0 doesn’t rely as heavily on tax liens and judgments — derogatory marks that hurt your credit — as the previous scoring models.
Medical collection accounts that are less than six months old will be completely ignored. VantageScore recognizes that consumers may be waiting for an insurance company to pay the bill during that time.
Additionally, unpaid medical collection accounts won’t hurt your credit as much as unpaid non-medical collection accounts.
3. It can also more accurately score ‘un-scorable’ consumers
If there isn’t enough recent information in your credit files, some credit scoring models might not be able to create a credit score at all.
For instance, FICO 8 and 9, the two most recent versions of the FICO-based scores, can only score someone who has at least one account that’s been open for at least six months and has at least one account that has been reported to the credit bureau within the previous six months.
VantageScore 3.0 and 4.0 scoring models can score about 30 million to 35 million consumers who can’t obtain a credit score from other models.
With the 4.0 release, VantageScore says it uses machine learning techniques to find patterns in the credit data and provide more accurate scores to this segment of the population.
However, increased accuracy doesn’t always translate to a higher score — it depends on the available information.
VantageScore 4.0 isn’t the first time a new credit scoring model has been released — and it won’t be the last. The new scoring model could have an immediate impact on some of your credit scores but the primary underlying data and factors that many credit score models rely on will remain the same.
Michael Bovee, credit expert and founder of Consumer Recovery Network, often helps people work on their credit after they’ve made credit mistakes.
Bovee says your credit can be important, particularly before using your credit to reach a goal such as taking out a mortgage. However, most people could benefit from taking a more holistic approach to their finances.
In other words, focus on paying down or off your debts, living within your means, and building an emergency fund — which could help keep a financial setback from becoming a credit-hurting late payment.