Have you ever wondered who Fair Isaac was?
Actually, it’s were. Kinda like how Pink Floyd got their name.
Engineer William Fair met mathematician Earl Isaac at the Stanford Research Institute, and in 1956 — back when computers had tubes — they introduced the credit scoring system that’s been a mainstay ever since for virtually everyone’s financial credibility.
That was over a half-century ago. Daily life’s changed. So, obviously, has technology.
It’s about time this model faced a serious challenge, and the three major credit agencies — Experian, Trans Union, and Equifax — are about to launch just that.
They’ll use their own vehicle, VantageScore, which processed over 8billion applications in 2016. If you filed one then, odds are this is the system that approved or denied you:
Starting in Autumn 2017, VantageScore will place a significant emphasis on trended data. Instead of producing a set score at a given point in time — the current practice, which gives no weight to whether your score is trending up or down — this will provide a credit assessment arc that takes into account a broader history of your financial actions.
If your payment trajectory shows you’ve been reducing debt over recent months, you’ll now score higher. Under the standard system currently in place, there wasn’t much difference between doing so and merely making minimum payments, which will now be scored lower.
This is huge.
Here are two examples of how the new way can be more forgiving:
- You’ve just made a major purchase such as an overseas flight or an online business franchise. That’ll put a big hit on your credit score under the current system, even if your intent was to cover it by the end of your billing cycle. Instead, VantageScore will note that you’ve historically kept your balances low and lessen the impact considerably, if not totally.
- You won’t need to maintain large credit limits. The new system could see that as increasing risk. Instead, if you deploy your credit responsibly and regularly pay more than the minimum monthly, that sort of trajectory would mean your score could actually improve. Thus, a $2000 balance on a $5000 line could grade better than a $3000 balance on a $30,000 line; the latter could potentially be exposed to more drastic action.
In other words, your credit will indeed become more of a viable tool and less of a tempting trap.
Obviously, this isn’t a license to run amok with your credit, and mortgages will still be dependent on FICO scores.
However, VantageScore’s development of trended data will create more flexibility in personal finance for those who plan to build and maintain a more fulfilling life.