7 New Ways Your Credit Rating Will Be Scored Over the Next 5 Years
The credit-scoring system we have known for many years might be about to change. The best-known and most widely used scoring system — the FICO score — weighs several different types of credit data, all of which make up a given percentage of your score. They include:
- Your payment history: 35%
- The length of your credit history:15%
- The new credit you've opened: 10%
- The type of credit mix you have: 10%
- The amount you currently owe: 30%
Now, experts expect some significant changes to this system. Wondering how to raise your credit score in the future? Learn more about the seven ways things might change. And, discover how each tweak might affect your future ability to maintain a good credit score and get approved for a loan.
New Credit Card Debt Evaluation Is on the Way
Perhaps the biggest change in credit scoring will be the way future scoring models evaluate your credit card debt, said Michelle Black, author, credit expert and president at Hope4USA, a credit education and restoration program in Fort Mill, S.C. Several years ago, the credit bureaus began to include "time series data" on credit reports. This information shows your current credit card account balances as well your historical balances, said Black.
Time series data, also known as trended data, will help lenders and credit-scoring companies figure out if a consumer is a "revolver" or a "transactor." Data shows that revolvers — consumers who typically carry a balance from month to month on their credit cards — represent a bigger risk to lenders, said Black. Transactors — consumers who usually pay off their credit card balances each month — are more likely to pay their bills according to the terms of their agreements.
Fannie Mae has already started using time series data in its Desktop Underwriter (DU) loan approval software system, said Black. She adds that this new information is highly predictive of consumer bill-paying behaviors.
"As a result, it most likely is only a matter of time before credit score creators like FICO and VantageScore begin to incorporate this data into their future credit-scoring models as well," Black said.
Borrowers’ Digital Presence Will Be Considered
Over the next five years, credit ratings will start to take into account a borrower's digital presence, said Ryan Brennan, president of Neat Capital, a financial technology residential lender with offices in Boulder, Colo., and San Francisco.
"If you're comfortable performing most tasks online and having a real digital fingerprint — including utilizing online banking and social media — great," said Brennan.
If you overshare your location — for instance, you might announce when your family is away on vacation — or get into pointless, online arguments with strangers and post hundreds of cat videos every year, you might be in trouble, said Brennan. For instance, if you're in the habit of notifying the world when your home is empty, it might negatively affect your score in the future because it will increase your insurance liability.
"Your behavior on social media might say more about you than you think," Brennan said. "Online arguments with strangers and cat videos are extreme examples, but both activities might highlight certain overall aspects of creditworthiness, like your level of education or time-management abilities."
Your Financial Habits Will Be Examined
Credit reports will also start to take into account a borrower's financial habits, said Brennan. If you have good habits, you'll be a more favorable candidate for credit.
Delving into your financial habits will include looking to see if you:
- Save a percentage of your paycheck every month for the unknown bumps along life's journey
- Take advantage of an employer-sponsored retirement savings account like a 401k or 403b, or an individual IRA
- Use a health savings account
Incorporating these financial habits into credit ratings will provide a better overall picture of your creditworthiness. For example, if you are saving money every month, you're likely a person who makes sound financial decisions about your credit, said Brennan.
"Additionally, if you are constantly saving for a rainy day, you're going to be in a much better position when any sort of financial or life hiccup occurs — meaning you will be in a better position to pay back your debts, which is what a credit score is assessing," Brennan said.
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Smart Data Will Be Used
Smart data is among the credit score factors that will likely influence credit scoring going forward, says Patrick Koeck, chief operating officer of Creamfinance, a growing European personal finance company with headquarters in Warsaw, Poland. Smart-data collection might include things such as tracking mouse movements or patterns in registration forms.
On the other hand, what is traditionally known as gathering of "big data" produces a huge amount of information and creates a lot of "noise," said Koeck. For example, it might be used in credit scoring to gather information from existing, static sources.
Using a "smart data" approach can be effective because it helps filter out the noise while retaining the valuable data. Smart data cuts to the heart of the issue faster and allows someone to look directly at the important issues and make decisions based on real-life, valuable information, Koeck said.
"For big-data gathering, the potential customer needs to provide a lot of information during the registration process, whereas we gather smart data ourselves to save time and effort," Koeck said.
Scoring Will Become Easier to Understand
As the lending process becomes truly digital, traditional methodologies to determine a borrower's creditworthiness will also advance, said Brennan. "In the current environment, borrowers are generally given a score and a report that only a forensic accountant can understand," Brennan said.
Brennan's firm features a tool in its mortgage application that allows borrowers to see lines of credit grouped together in a logical manner, allowing for clients to easily understand their credit situations and dispute any inaccuracies in credit reports.
For example, all lines of credit associated with automobiles are grouped together to make it easier to see a customer's outstanding auto loans. This in turn makes disputing a line of credit easier, as a borrower will know how many cars he has and how many lines of credit are outstanding — and if a line should have been closed but was not.
"This sort of transparency is going to allow for more accurate credit reports in the future," said Brennan.
Medical Collections Will Have Less Impact on Your Score
Outstanding medical bills can hurt your credit score significantly. And many people can't afford to pay or negotiate big hospital bills, so there is no shortage of credit score damage associated with that type of debt.
But in the future, medical collections are likely to be less damaging in your score calculation, said Wendy M. Nastasi, owner of Crossroads Finance in Pompton Plains, N.J. This would help people with bad credit dings that apply only to medical collections.
In 2016, Fair Isaac Corp. introduced FICO 9, a new credit-scoring formula. It's designed to differentiate between regular and medical collections, and it doesn't weigh medical collections as heavily in your credit score.
"Theoretically, we should be seeing a 25-point increase on people's scores that initially included the medical collections," said Nastasi. "I am not sure how much improvement we are currently seeing, but as time goes on, I definitely think this will positively impact credit scores."
Your Education and Occupation Will Count in Your Score
A borrower's education and occupation will also be used in calculating a credit rating over the next five years, said Brennan. Currently, scores are based on how reliable an individual is at paying liabilities. "But what this misses is assessing someone's income and assets related to those liabilities," said Brennan.
Your level of education — and the field in which you work — might affect your credit score in the future, said Brennan. "For example, if you're a doctor who has recently graduated, you'll likely be saddled with debt and not look like a great credit risk on paper," she said.
But given that doctors have fairly normal income trajectories, it's relatively safe to assume that "you're more creditworthy than a current score might indicate, namely because of the high likelihood of your normalized future income growth," Brennan said.
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