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Adjustment in the credit score formula, What you need to know!
This week, VantageScore Solutions announced the completion of VantageScore 4.0, its fourth-generation credit score. VantageScore, a rival to FICO(Fair, Isaac and Company), has experienced rapid growth and supplies the credit score used by most leading free credit score sites, including CreditKarma. Due to VantageScore’s growing influence lenders are also increasingly turning to VantageScore, with 20 of the top 25 financial institutions using the score in some of their underwriting decisions.
With the new version of the credit score comes three changes that can have a big impact on millions of Americans:
Less emphasis on medical collections and other derogatory and public-records data. More reliance upon “trended data” rather than static data. Use of machine learning to create better scores for people with limited credit data.
What changes will affect my credit score?
For you to better understand the impact this upgrade will have on credit decisions I will be explain each change in greater detail, including the potential impact on borrowers.
1. Less Emphasis On Medical Collections And Other Derogatory Data
According to the Consumer Financial Protection Bureau an incredible 52 percent of all overdue debt on credit reports is from medical expenses. Medical debt appears as a collection item, which can easily take 50 points (or more) off your score and make your life a lot more expensive.
A significant portion of medical debt ultimately gets paid late by insurance companies. The delay is often the fault of cumbersome administrative and billing processes, yet the individual’s credit score can get negatively impacted regardless.
In the new version of the credit score, medical collection items that are less than six months old will be ignored to allow time for insurance-payment processing. Therefor other medical collection items will be punished less than non-medical ones.
The new score will also place less weight on derogatory and public-records data, especially in light of the recent agreement by the credit reporting agencies to remove these items from credit reports.
Impact: If you have a bad score because of medical debt (especially small medical debt that wasn’t your fault), relief is in sight. Other collection items will also matter less.
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