How Will the Impending Credit Changes Affect Your Score?

We all know that one of the biggest challenges small business owners face is access to capital. Access to sufficient capital in business is the lifeline that can keep an entrepreneur afloat.

New business owners especially often have to rely on their personal access to credit in order to finance the beginning stages of their business operations. This is why it’s important for business owners to stay abreast of how their personal credit score can affect their ability to get credit for the purposes of funding their business’ operating costs.

Fortunately, some changes coming down the pipeline could positively affect millions of Americans’ credit scores. Not only could these changes boost personal credit scores, but they could also help more aspiring entrepreneurs access personal credit while paving the path to business creditworthiness.

Business owners (and aspiring business owners) should be aware of these two major changes:

• The implementation of the National Consumer Assistance Plan (NCAP)
• The VantageScore 4.0

National Consumer Assistance Plan

In a nutshell, the three major credit reporting companies (CRCs): Experian, Equifax, and TransUnion are raising the standards for the type of information that can be included on a credit report, otherwise known as the National Consumer Assistance Plan.

The NCAP’s website explains the impending credit reporting changes as an attempt to make “credit reports more accurate, transparent, and understandable.”

According to a statement by the Consumer Data Industry Association, the trade organization for a number of CRCs and related companies, the new NCAP standards will apply to new and existing public record data on their respective credit reporting databases and require:

• Personal identifying information (PII) that includes name, address, social security number, and date of birth.
• A minimum frequency of courthouse visits to obtain newly filed and updated public records of at least every 90 days.

These new standards mainly affect items like civil judgments and tax liens as most of these records do not meet the requirements for sufficient PII. Starting July 1st, consumers should begin to see items that don’t meet these requirements removed from their credit reports across all three CRC reports.  

Additional highlights of the NCAP can be found on the website and have standards that apply to various credit reporting issues surrounding medical debt, filing disputes, dealing with debt collectors, and more.

How the NCAP Standards Will Affect Your Credit Score

If you’ve been denied credit due to a lower credit score that might have been compromised by civil judgments and tax liens, your score could be positively affected. If your score is lower due to other negative items, don’t expect much of a change in your credit score.

What You Need to Do

Even though the credit bureaus have announced their plans to remove information from consumers’ reports that doesn’t meet the new PII standards, it’s important for you to monitor your credit report for incorrect information. If come July 1st, you don’t see any of these changes taking place on your report, it’s best to file a dispute with the credit bureaus to get it removed.

If you’ve got a shot at a better personal credit score, stay on top of it. You might have to do some work so that it pans out, but it will be worth it to increase your access to credit and capital, especially as a business owner.

The Vantage Score 4.0

Another change taking place is the newest update to the VantageScore credit scoring system. If you are not familiar with the VantageScore, it’s an alternative to the FICO credit scoring system.

The brainchild of the three major CRCs, the VantageScore has gone through many iterations since its creation in 2006. The VantageScore 4.0 scoring system will roll out sometime in the fall of 2017.

Although you are more likely to get a credit application evaluated on the basis of a FICO score than a VantageScore, VantageScore is gaining prominence. According to the company’s website, “8 billion VantageScore credit scores were used in a 12-month period in 2015–2016—an increase of nearly 40% over 2014–2015.”  

You are probably more familiar with the VantageScore if you routinely access your credit score on sites that offer either free or low cost access to your credit report.

All in all, these credit scoring systems were created to assign a risk profile to people requesting access to credit. That’s where the score part comes in. A higher score indicates a borrower who is less likely to default on a credit obligation while a lower score means the opposite.

According to VantageScore’s website, the new changes are beneficial to both lenders and consumers. The website also explains the three biggest changes that will influence the VantageScore 4.0 credit rubric:

• Seeking to be in alignment with the NCAP standards, the VantageScore 4.0 model suppresses significant numbers of negative entries, including tax liens, certain other public records, and some collections accounts.
• The score uses trended credit data for individual consumers instead of static snapshots of a person’s credit use.
• Finally, the use of machine learning aims to help the VantageScore 4.0 system provide more accurate risk profiles for newbie borrowers.

How These Changes Could Affect You

Because the VantageScore 4.0 will also be in alignment with the NCAP standards, there’s a chance that both your FICO and VantageScore credit scores could be affected by these changes. Beyond this, the VantageScore 4.0 could change your credit rating (not applicable to your FICO score) in other ways.

As mentioned, if you don’t have much of a credit history, the predictive nature of the VantageScore 4.0 model attempts to assign a risk profile to you anyway. This could be beneficial if you’ve ever been denied credit because you lack an established credit history.

The other side of the predictive tendency in the model could penalize borrowers with too many open lines of credit. The idea is that someone with more open lines of credit could potentially charge more than they could pay back.

Second, the use of trended data means that instead of penalizing you for things like big purchases (which would affect your credit utilization) at a single point in time, the score will look at overall trends in your credit patterns.

Again, don’t assume these changes will be automatic (or even that lenders will begin to use the Vantage 4.0 model immediately). You’ll have to check your credit report regularly for errors for information that is not in compliance with both NCAP standards and VantageScore 4.0 standards.

How Does All of This Affect My Access to Business Credit?

If you been looking for access to credit that might help fund your business, explore whether any of the upcoming changes could result in a score that qualifies for more credit at better rates.

It’s also important to note that the VantageScore is not as dominant as FICO in the credit evaluation process. These changes only apply to this score, so when you are dealing with lenders that actually use the VantageScore.

Bottom Line

John Ganotis, founder of the website Credit Card Insider, adds that the credit scoring equation has many moving pieces:

“It’s important to remember you don’t just have one credit score, you have dozens of scores. Each score can be calculated using information from one of your three credit reports. Since information can vary from one credit report to the next, the score that’s calculated from each can vary, too.”

Though there’s a lot to consider when it comes to monitoring your credit report and credit score, it’s not impossible to do. Many services out there can help you with this, and you can find tons of information for learning about how credit scoring algorithms changes can affect your credit negatively or positively.

After all, your personal credit is the gateway to your ability to obtain business credit. Make sure you understand all the factors (and how they change) that impact your personal credit score to lay the foundation for your business in the future.

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from Fundera Ledger https://www.fundera.com/blog/credit-changes