Credit bureaus TransUnion and Equifax have recently announced that they will be implementing new methodologies in assessing credit score, to be implemented later this year.
These major bureaus own a company called VantageScore, which creates the mathematical model used to determine your credit rating. VantageScore is the measure used across the three major credit bureaus.
You have likely heard recommendations to help raise your credit score, such as not maximizing any of your credit cards. If you spread your credit card debt across several credit cards, you keep a lower percentage of each card limit exhausted. Your score could be artificially higher because credit bureaus were known to use percentage of available limits as a relevant measure of a person’s credit worthiness. However, changes in VantageScore’s new methodology may cause you to reconsider the approach you take to handling your debts.
The credit bureaus and VantageScore are now focusing on “trended data”. This means that there will be an increased focus on consumers’ habits over time, and historical trends in their credit card usage. The use of trended data is aimed at analyzing and predicting problems that may arise in the future.
For example, a consumer may not exhaust his or her credit limits. However, historical data showing that the person’s credit card balance has slowly crept up over time (i.e. regardless of credit limits) may raise a red flag and lower one’s credit score. This may be the case even if he or she is not defaulting on payments, and has not yet approached card limits.
On the flip side, a person who is carrying a large percentage balance on a single credit card, but who is diligently paying it down over time may end up with a higher credit card score than previously.
Equifax’s website provides a useful summary of how trended data may affect lenders decision about who to lend to and how much to lend.
Should I Keep Multiple Credit Cards Open?
Looking at the new methodology being used to assess creditworthiness, it appears to be an unwise move to keep old or unused credit cards open. In the past this could help you, as each credit card being kept at a zero balance or low balance would be considered in your overall credit score.
However, the use of more complex data analysis mean that keeping extra credit cards open may actually hurt your credit score. If you have an excessive amount of credit available to you, there could be a greater potential for credit card debt to become a significant problem. On the other hand, having only one credit card with a modest credit limit means that your credit card debt is less likely to spiral out of control.
Further, keeping a low balance relative to your available credit limit is will not be weighted as heavily as keeping a low total credit card balance. So, while it may previously have been smart to spread $6,000 in credit card debt over two credit cards with $10,000 limits on each, having a $3,000 balance on a single credit card with a $10,000 limit is now more likely to attract a higher credit rating.
How You May be Affected by These Changes
As above, the use of trended data is intended to predict risky consumer behaviour and to prevent giving excessive credit to consumers who are exhibiting signs of being unable to pay down their debt. If you have consistently carried a credit card balance, and has been unable to pay down more than the minimum balance, the use of trended data may negatively affect your credit rating, making it more difficult to obtain a loan or a low-interest mortgage.
Further, if you are looking to offload some of your credit card balance on to a second or third credit card, in order to obtain a better credit rating, this simple strategy may no longer work. Credit card companies may be more likely to deny applications for additional credit when presented with a lower credit rating reflective of a person’s failure to pay down their existing debt over time.
As such, you may find yourself burdened by a lower credit card rating that affects your ability to take out a loan, borrow money for business purposes, or take out a mortgage. If you are a renter looking for a new place to live, a low credit score can also affect your rental application in some cases.
Harris & Partners Inc. Provides Debt Help in Ontario
If you are burdened with credit card debt that you cannot pay down, the use of trended data by credit bureaus may create new challenges for you by reducing your credit score. If your level of credit card debt is taking you on the path to personal bankruptcy, call us right away. A Licensed Insolvency Trustee (formerly known as a Trustee in Bankruptcy) can help reverse a downward trend and model a debt solution for you that fits with your needs. Call us today for your free consultation in one of our offices in Oshawa, Brantford, Barrie, or other locations in Ontario.