Changes are being made to the way credit agencies calculate your credit score – and it's good news if you've got a proven history of paying down debt.
Later this year, VantageScore – a credit scoring model developed by the major credit reporting bureaus TransUnion, Equifax and Experian – will introduce its latest model, VantageScore 4.0, which will put more emphasis on something called "trended data."
This is designed to be fairer to people who have an established record of making credit payments on time, even if they have a lot of debt.
Who will this benefit?
Currently one of the major factors in your credit score is how much of your available credit you are utilizing.
Typically, if you're using more than 30 percent of your available credit (e.g. $3,000 debt on a $10,000 limit), this negatively impacts your credit score.
However, VantageScore's new methodology will take into account an individual's history paying off debt. So someone who makes regular payments on their credit cards won't be as badly impacted if they take on a lot of debt, compared to someone who piles on more debt and pays off smaller amounts.
As Credit.com explains, the new model looks at how a consumer's credit balance changed over a period of months, rather than taking a "single snapshot in time" that doesn't show the full context of their spending and debt-paying behavior.
Why the change?
One of the main reasons this is being brought in, the Washington Post notes, is so it doesn't penalize consumers who have good credit scores but take a hit if they make a major, one-off purchase with their credit card, such as travel tickets.
A purchase like this could see them go above the desired "30 percent of available credit" mark, and their credit score could go down as a result – even if they were planning on paying the debt off in full, on time.
While the changes to VantageScore will benefit consumers when they apply for credit cards, loans and other forms of credit, it won't have an impact if you're applying for a mortgage, as most mortgage lenders rely on FICO scores.
The FICO score is still the preferred credit scoring model used by many lenders.
But since it was introduced in 2006, the VantageScore has been growing in stature, and in 2016 it was used by 2,400 lenders and 2o out of 25 of the largest financial institutions in the U.S. It uses the same 300-850 scoring range as FICO.
If you're looking for ways to improve your credit score, regular GoMN column The Tip Jar has put together this guide.