Credit Scores Likely to Rise

Credit scores recently reached a record high and given changes to the industry, they could continue to rise. According to Fair Isaac Corporation (creator of the widely used FICO score), the average score hit 700 during the spring, the highest since at least 2005. As a reminder, FICO scores range from 300 to 850 and borrowers with scores above 750 are generally considered excellent, while scores below 650 are considered poor. The three most important factors that determine your FICO score are: payment history, total debt outstanding, which takes into account how many accounts you have and how close you are to your credit limit and the number of hard credit inquiries made on your behalf from mortgage, auto or student loan companies.

(“Soft" inquiries, which include pre-approved offers, insurance or employment searches; and when you check your own credit report or score, do not hurt your score.) The score also includes the mix of credit that is available to you and your credit history.

Because credit scoring is used to determine the cost of borrowing and also for apartment rental purposes, the data used to compile it must be accurate and complete. That’s why it is important to check your credit report at least annually at www.annualcreditreport.com. If you find errors, you can dispute any information by visiting the company whose report you wish to dispute.

The good news is the process should be easier, because of the National Consumer Assistance Plan (NCAP), which was launched in 2015 by the three nationwide consumer credit reporting companies – Equifax, Experian and TransUnion, after a class-action lawsuit demonstrated that consumers were harmed from bad data.

The purpose of NCAP is to make credit reports more accurate and make it easier for consumers to correct any errors. As of July 1, the credit reporting companies will enforce stricter rules about the accuracy of the data it collects, including the reporting of civil judgments and tax liens, which could help boost the credit scores of millions of Americans by 10 to 40 points.

Meanwhile, FICO’s competitor, VantageScore Solutions, recently announced the release of the fourth generation of their score, which will become available from the three credit reporting agencies in the Fall of 2017. According to credit expert John Ulzheimer “it’s a game changer,” because it will consider “trended” credit data, which accounts for whether borrowers are paying their credit card balances in full each month, or if they’re just making a token payment and adding to their monthly balances. The data will reflect historical balances and the amount you paid going back 24 months. This makes sense because “people who do not pay their cards in full each month are riskier than people who do pay them off in full each month,” says Ulzheimer.

That’s why paying your bill in FULL each month is likely to become even more important. “Notwithstanding the fact that you’re paying interest on the unpaid balance, now by not paying your balance in full your VantageScore 4.0 score is likely to be lower because you’re a riskier consumer.” Conversely, those who do pay off their balances in full each month will likely enjoy a higher score.

Before you get too excited about the new score’s roll out, it is important to know that VantageScore is number two in the market—FICO still reigns supreme. But Ulzheimer believes that the VantageScore 4.0 is better for consumers and better for lenders. “It’s rare that a new scoring system is a true win-win for consumers and lenders…and VantageScore 4.0 is just that.”