Over the past 20+ years since credit scores were created, there have always been new and improved scoring models coming out and being used when you applied for cars, loans, and credit cards. The only creditors who’ve been sticking with the same old models were the mortgage lenders. For mortgage loans, only the Fico 2, 4, and 5 scoring models were used up until now, nothing newer or better.
The Federal Housing Finance Agency finally announced that it had approved two new credit score models to be used by Fannie Mae and Freddie Mac, the FICO 10T, and the VantageScore 4.0!
What's the difference between the old score and the new?
The new scores are built to more accurately reflect a consumer’s lending risk. This more accurate reflection will be better for some but worse for others… Let’s discuss the differences between the older scoring models and the new ones.
The first of the two models they’ll be upgrading to is Fico 10T, which is unlike Fico 10.
The T stands for Trended Data.
Trended data gives lenders the full picture of your balance history over the course of 24 months, rather than just the previous month’s data.
For example, let’s say you maxed out your credit cards and then slowly started to climb out of the debt. For the past 6 months, your debt has started to fall from month to month and you’re currently only 60 percent maxed out. Your credit utilization will currently stand at 60%, but it’s trending downwards. Good for you.
Your friend has lately gotten into a terrible shopping habit, and over the past six months, has slowly been building up huge balances. They are currently hitting 60% utilization on all their credit cards. Their credit utilization is at the same 60% as yours but the difference is that they are trending upwards, which is no good.
Now, when both of you apply for a new credit card, who is a riskier borrower? You or your friend? The answer is most likely your friend. That is because you are slowly climbing out of the mud, while your friend is currently sinking into the mud.
With the previous Fico scoring models, such as Fico 04, you and your friend would score the same, since you’re both at 60% utilization. With trended data, Fico 10T will not only look at the current utilization but it will look back at your balance history and summarize your activity of the past 24 months. Trended data looks at patterns, not just at the end result.
Why It Matters
The fact that Fico does not calculate trended data in the other scoring models has often been to the advantage of the consumer. Even if a consumer, for whatever reason, needed to max out their credit cards, as long as that balance was paid up before applying for a line of credit, there were no problems. Fico only calculated the current balance. But with Fico 10T, high balances may affect you for a full 24 months! For many consumers, this will make it take much longer for them to put their dirty deeds behind them.
However, as mentioned earlier, trended data has its good side too. Such as picking up if you’ve been paying your balance in full each month rather than getting away with minimum payments. They’ll be zooming out to see your activity in full view, rather than sneaking peeks at it.
Your rent and utility payments will be counted
Another advantage of the new models, Fico 10T and Vantage 4.0, is that your rent, payments, and telecom payments (if they are reported to your credit report) are factored into your credit score.
The benefit of this, given that you make those payments timely, is that even if you’re young and don’t yet have a mortgage under your name, you can still build up the installment credit part of your credit report. By making on-time payments to your landlord and utility lenders, you can be recognized for it and help push your credit score up.
There are many more differences between the newer Fico models and the old ones currently used for mortgages. Here is a list.
- With the newer models, medical collections have less of an impact on credit scores than other collections.
- With the newer models, collections which are paid no longer impact your credit score.
- With the newer models, a collection for less than $100 dollars does not affect your credit score.
- In regards to charge cards/no preset limit cards, the older models would count the highest balance within the last 24 months as your credit limit. With the newer models, charge cards are mostly excluded from credit utilization calculations.
- The rate shopping period is 45 days instead of 14 days.
- And last but not least, starting at FICO 08, FICO killed a good, old trick piggybacking credit.
When will the new models go into effect?
As we speak! Mortgage lenders can already use models Fico 10T and Vantage 4.0 for mortgage applications. But in real life, it’s going to take time until mortgage lenders adapt to it.
If you’d like for Fico 10T and Vantage 4.0 to be used, try shopping with your mortgage broker for a lender that is already using it. As time passes, you will hopefully be able to find more and more lenders that will give you this option.