Did you know that not only are credit scores calculated differently between bureaus, but the formula for VantageScore (the credit rating formulated by the Big Three credit bureaus and available for free through Quizzle) formulas also changes?
While VantageScore’s resulting scores can vary between credit bureaus, the composition of the score – the analytics used to create a composite image of individuals’ financial habits – is standard across the three bureaus. Differences in scores between bureaus can be attributed to non-identical information collected and held by the different agencies.
While the formula is pretty standard — approximately 40 percent payment history, 21 percent depth of credit, 20 percent utilization, 11 percent balances, 5 percent recent credit and 3 percent available credit -– it is not a concrete methodology. The scoring model used by VantageScore changes frequently to reflect overall trends within society and is currently on its 3.0 iteration.
Types Of Changes
The changes that occur over time arise from trends the corporation and affiliated agencies have taken note of and further analyzed.
For example, the most recent scoring model, the VantageScore 3.0, was rolled out in 2013 and sets itself apart from previous iterations of the formula by ignoring unpaid and paid medical debt (unless it is outsourced to collection agencies), temporarily ignoring delinquency payments flagged because of natural disasters, differentiating among student loan payments and lessening the history period necessary to generate a score (as quickly as one month) and increasing the period of credit activity (any activity within 24 months).
These changes were made for a variety of reasons, but regarding medical debt in particular, this flavor of debt has been ignored within the VantageScore 3.0 because it has been deemed non-indicative of an individual’s repayment probability. The Consumer Financial Protection Bureau conducted extensive research, concluding unpaid medical bills were disproportionately underestimating creditworthiness of medical debt holders.
VantageScore Vice President of Communications and Public Relationship Jeff Richardson commented, “Our analysts developed the model (for VantageScore 3.0) based on a consumer database that reflects consumer behavior.” He continued, “If you’re using a model based on how the world used to be […] it isn’t going to be as accurate.”
So, why does all of this matter? Is the math behind credit scores really important for average Americans to worry about?
Why You Should Pay Attention
Using the changes in the VantageScore 3.0 as an example, by eliminating medical debt and using a shorter credit history basis, more consumers are able to not only receive a credit score, but see a more accurate and representative number of their creditworthiness. Richardson commented that the VantageScore 3.0 is expected to generate a score for 98 percent of consumers, creating a substantially more inclusive model for consumers.
Being aware of how scores are calculated and changes that can be adopted by different bureaus can help you as a credit holder make informed decisions about your financial portrait.
Regardless of whether you are affected by algorithm changes, being aware of them and your credit health is always a financially savvy move. Take the time to know what is being reported about you, check for errors and look for ways to bolster your credit.
Above all, it is your responsibility to use credit wisely. Stay informed and invest in your future financial health today.