Millions of American consumers realized over the past few years just how difficult it is to live with a lower credit score. Even those who had enjoyed the perks that come with high scores, such as options in which credit cards they apply for, may live in a new reality these days. The foreclosures and high unemployment has changed the game for so many. Others know the vicious cycle that comes with lower credit scores.
Blame the Flu
It starts out with missing a week from work because of the flu or some minor operation. Some had sick pay stored with their employers, others didn’t. Some had insurance that covered the surgeries and required medicines and others either didn’t have enough insurance or had none at all. From there, they juggled their budgets to put off a payment for a week or covered one bill while letting the other one go for a month. Soon, their credit scores took a hit with a late credit card or mortgage payment.
From there, they realized they now had an additional late payment tacked on to their next statement which didn’t help matters. Soon, they found themselves struggling to make up that missed payment. A year later, long after they or their family member had recovered from the flu or the surgery, they realize it’s time for a new car. They might have been approved, but it was at a higher interest rate and required a bigger downpayment. They figure they’ll refinance at some point, but in the meantime, they’re still struggling. Their scores have dropped and they wonder how one late payment set off such a domino effect. It’s a story that can be heard in millions of households. Some recover better than others. And for the others who can’t break the cycle, it can take years to pick up the pieces.
Now, though, a new credit scoring model can potentially improve the credit for many of those consumers while helping them re-establish their credit. Its a scoring model. While it’s not necessarily new, the changes made in recent months has brought it mainstream. This new scoring model, VantageScore, was created by the three major credit bureaus – Experian, Equifax and TransUnion.
As things are today, when debts go into collection and even if they’re paid off at some point are given weight into future credit scores for up to seven years. When a lender uses VantageScore 3.0, those collections aren’t considered if the debt was paid off.
And this is good news for victims from Super Storm Sandy and even Hurricane Katrina. These victims are also in a position to benefit from the new models. They’re better protected from the credit hits that come with natural disasters. Anyone who’s lived through them understands what it’s like to not have a job to return to. These are the ones who truly redefine the phrase “picking up the pieces” because they too are literally rebuilding their homes and neighborhoods. Frankly, few are worried about their credit scores. Their concerns are making sure their little ones have food for the day and clothes to wear. In the past, creditors were willing to go around a credit score in its entirety, which meant their positive accounts were ignored as well. It truly was a waste of everyone’s time. If a lender isn’t going to consider the good in a credit report then where are they going to make their determinations, right? Now, though, the new model ensures this never happens.
Ah – but the kick in the pants is that the lender must use VantageScore. We checked with the website and it looks as though this new model is being used by seven of the top 10 financial institutions, six of the top 10 credit card issuers and four of the leading auto lenders and mortgage lenders.
FICO to Follow?
And there’s more. FICO announced this week that it too may begin considering alternative methods for creating credit scores. If it does, more than 30 million Americans may find doors being opened that were previously closed. They can qualify not only for more loans, but for loans with competitive rates. Need perspective? Texas has close to 27 million people who call it home.
The VantageScore 3.0 model is both a new model, and new path forward for VantageScore Solutions and the credit scoring industry. The model was built with a lender’s implementation and risk management needs in mind, in conjunction with a deeper understanding for what information consumers need to become better managers of their own credit,
said Barrett Burns, president & CEO of VantageScore Solutions. He goes on to explain that the current lending environment reveals the consumers aren’t given access to the right lenders and those lenders are also missing out on opportunities to develop new relationships with consumers that would be a “win win” situation. With the new formulas come new and contemporary degrees of certainty for both consumers and lenders to move forward with confidence.
Easy to Understand Reason Codes
Some of the changes include fewer reason codes and easier to understand explanations behind those reason codes. When consumers understand the mindset of lenders and why they’re declined or approved conditionally, they are better able to make the changes that will lead to even better credit offers. Further, consumers are given two character numeric codes with an explanation as to why their scores were higher. They also receive a glossary of what those codes mean. If it sounds like this is something CFPB would have ordered, it’s because more in the financial sector are beginning to see the benefits of working for the consumers versus forcing consumers to “take it or leave it”. As a result, lenders are better able to reach the consumers who most need access to stronger credit. Today’s competitive lending environment dictates that lenders need access to as many creditworthy consumers as possible within their target universe.
Rent payments, utility payments and even cellular payments can all now be factored. It’s believed this model with provide a 25 percent predictive improvement for both prime and non prime consumers. This has been justified in mortgage, credit cards and personal loan lenders.
It’s an idea whose time has come and ultimately, it will serve the needs of millions of Americans who desperately need access to credit.