New Alternative Methods Lenders Are Using to Assess Your Credit

NEW YORK, March 14, 2023 (Newswire.com) - Credello: With so many feeling the pinch of inflation and an unstable economy, it's no surprise that lenders and credit bureaus are deciding to adjust their methods. The traditional ways of determining creditworthiness just aren't realistic any longer, and credit reporting agencies are changing to reflect the times. Here are the new changes coming to your credit score.

Changes to FICO scores

The most popular method of determining creditworthiness is the FICO score. There are numerous versions of the FICO score, but generally, the FICO score 8 is the most widely used. 

What is FICO score 8?

Initially released in 2008, FICO score 8 was an updated model that used data from all three credit reporting bureaus (TransUnion, Experian, and Equifax) to calculate your credit score. Since then, other scoring models have come out, but model 8 has proven to be the one credit card issuers tend to stick with for determining whether you qualify for a new credit card.

FICO score 8 calculates a number between 300 - 850 by using five weighted factors and is "more predictive" than previous versions:

• Number of on-time payments (35%)
• Amount of credit used (30%)
• Credit history length (15%)
• Number of credit inquiries (10%)
• The mix of credit (10%)

How are FICO scores changing?

To adjust for new economic models, the Fair Isaac Corporation has decided to change the factors determining your FICO score with their latest model, FICO score 10.

1. Adding trended data to calculations - "Trended data" includes 24 months of your balance, payment, and credit utilization history behaviors. Previously, none of this information was used as a determining factor.

2. Removal of medical debt - Medical debt is a huge factor for many under- and uninsured, leading to debt levels in the tens or hundreds of thousands. Now certain medical collections will no longer be a factor in assessing your credit utilization. 

3. Adds rental payment history - Since many younger generations opt to rent, FICO has adjusted its scoring model to include rental payments as a consideration.

Changes to VantageScore

VantageScore is another credit scoring model that works similarly to FICO scores but was created to be "more inclusive" for scoring potential credit candidates (VantageScore estimates it "[opens] credit access to approximately 96% of adults in the US.") and leans heavily on predictive modeling to determine whether an applicant will be able to pay off their debts.

VantageScore 4 is now out and, like FICO score 10, includes the removal of medical debt and trended data, but also includes public records and machine learning to give a comprehensive picture of borrowers who may not have previous credit histories. In particular, this new scoring model was designed to benefit minorities in the U.S. who historically have had difficulties getting approved for credit and loans.

VantageScore 4 also now includes more emphasis on bank cards and checking or savings account histories to determine creditworthiness. It can also determine a score within one month, making applying for credit or loans even faster than traditional models, which took six months to establish a score.

Other new opportunities to boost your score

In addition to FICO and VantageScore updates, there are new developments in how you can adjust your credit score quickly.

Experian Boost can give instant increases in your credit score by considering your payment history for things like streaming services, utilities, and other bills. 

Signing up for UltraFICO can raise your credit score by using the history of your checking and savings accounts and the evidence of consistent cash on hand to your FICO score. UltraFICO was specifically designed for those with no credit or low credit scores who want a more comprehensive look at their finances to determine their creditworthiness.

The bottom line

Many changes are coming to credit scoring models, so it's important to keep up with the latest changes and understand how each model works and which opportunities you can take advantage of to optimize your credit score.

About Credello

Credello is a financial tech company offering a personal finance tool that simplifies financial decisions through personalized, on-demand recommendations — so users can borrow, save, or invest with confidence.

Credello believes that finding the right financial product should be as easy and interactive as online shopping, and we are on a mission to make that possible. For more information, please visit https://www.credello.com. 

Source: Credello