Just when you thought you knew how to get the credit score you needed for the loan you want, the rules have been changed mid-game. It’s hard to keep up with all the recent changes in the way credit scores are being calculated and used. But they can affect everything from the interest rates you pay, to the jobs you get, to the apartment you can rent. So we’re giving you a heads up. Here are seven things to know now about credit scores:
1. Higher scores needed
Lenders have raised their standards in recent months, requiring borrowers to have better credit scores to qualify for some loans. And the interest rate premium paid by those with poor credit scores has become steeper.
2. No more free rides
FICO, the company that created the most widely used credit scoring system is tweaking its model in an effort to make it more effective in predicting credit risks for lenders. One big change: people with bad or no credit can no longer get a score boost by “piggybacking” as an authorized user on the credit card of a person with good credit.
3. Quality, not just quantity
The new scoring model, dubbed FICO 08, will give more points to people who maintain a variety of credit types – such as a mortgage, credit cards and an auto loan – rather than just one type.
4. Separating bad from worse
FICO 08 will go easier on those who have one late payment on their record but other accounts in good standing. Those who have multiple delinquencies in their history, however, will be graded more harshly.
5. Score one more for the credit bureaus
Making things more confusing, the three major credit bureaus in 2006 introduced a new scoring system to compete with FICO, called VantageScore®. VantageScore® takes into account most of the same factors as FICO but uses a different numerical scale and assigns consumers a credit letter grade. FICO is still the score most commonly checked by lenders, but VantageScore® could become more important in the future.
6. And one more…
You may not be aware that some insurance companies use your credit history to determine the insurance rates you pay. This means that how you handle credit may affect the cost of your car insurance, your homeowner’s insurance, and even your health insurance.
7. Everyone’s going by the numbers
Lenders and insurance companies aren’t the only ones interested in your score. Employers, landlords, insurers and cell phone providers are increasingly using it to evaluate you as a potential employee, renter and client.
VantageScore® is a registered trademark of VantageScore Solutions, LLC.