Points and miles enthusiasts know that earn and keep a excellent credit score is an essential part of a successful, ongoing credit card rewards strategy. Good credit is key if you want to be in the best possible position to qualify for the future sign up bonus, premium credit card and more.
A smart way to protect your credit score (and avoid wasting money on expensive interest rates) is to pay off your credit card balance in time. Grace period every month. This good habit can help you maintain a lower standard of living. credit utilization rate—especially if you consistently pay each card balance by the statement closing date. In fact, it’s very important to pay off your full credit card balance, which is one of TPG’s mandates. 10 commandments about credit card rewards.
What is changing?
Announcement October 2022 Federal Housing Finance Agency (FHFA) has forced consumers to pay their credit cards in full each month. In an effort to modernize the credit scoring model that mortgage lenders use in the home financing process, Fannie Mae and Freddie Mac will begin using new credit scores: FICO 10T and VantageScore 4.0.
The interesting thing about FICO 10T and VantageScore 4.0 is that both credit score models look at trending data. The data tends to take a closer look at how you’ve managed your credit card payments over the past 24 months—including how often you’ve paid in full or rotated your balance.
If you’re someone who is in the habit of keeping a balance on your credit card every month, your credit score may be lower than if a credit score lender looked at data for trends. For credit card balance spins, future home purchases can be more difficult.
Related: Credit card strategies for mortgage and home loan applicants
Why do mortgage credit scores change?
Lenders use credit scores to help manage risk. The purpose of a whole FICO and VantageScore Credit scores are used to predict how likely a consumer will be to pay a late credit obligation (90 days or worse) within the next 24 months. For mortgage lenders and credit card issuers, credit scores help companies determine which applicants are most likely to pay back the money they borrowed as promised.
Over time, consumer credit behavior changes. Credit score developers like FICO and VantageScore create new credit score models that take these changes into account and can generate a more accurate and up-to-date credit score.
You can think of new credit score models like the software updates your smartphone manufacturer regularly releases. Your smartphone will work without the update, but may not work as well as it should.
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Government-funded businesses (GSE) Fannie Mae and Freddie Mac have used the same credit scoring model for the past 20 years: the classic FICO. And although FICO and VantageScore Solutions announced many new credit scores during that time, mortgage lenders were unable to use them because the GSE did not allow them to do so.
Related: Your FICO score and which credit issuers offer it for free
The credit scores that mortgage lenders use could have a meaningful impact on American families. So in 2018, Congress directed the FHFA to review new credit score models that lenders can use to evaluate mortgage applicants. The FHFA and GSE spent several years validating potential credit score models before finally approving FICO 10T and VantageScore 4.0 for use in mortgage lending.
Two of the most important goals that the FHFA and GSE hope to achieve once lenders begin using a newly approved credit score are as follows.
- Improve credit score accuracy: According to FICO, mortgage lenders can reduce default risk by up to 17% by updating to the newer FICO 10T scoring model. Fewer mortgage defaults—foreclosures—will promote a more stable housing market and potentially better interest rates for borrowers around the world. (Of course, other factors also affect mortgage rates.)
- Greater access to home ownership: In addition to trending data, newer credit score models approved by the GSEs also look at rent, utility, and mobile phone payment history (if available on your credit report). consumption). As a result, more people may qualify for a credit score and may be eligible to buy a home in the future. VantageScore says the credit score changes approved by the FHFA could empower millions of credit-worthy Americans to buy a home.
Related: Tips on how to prepare to buy a home
What effect does this have on you?
It may take several years for the mortgage industry to accept the credit score updates the FHFA announced in October. In addition to the new credit score review, mortgage lenders will begin reviewing two of number three consumer credit report from major credit bureaus future (rather than all three credit reports as is customary today).
The delay is good news for anyone currently working to pay off credit card debt. That means you may have a little time to improve your score if you’ve developed some bad credit card management habits.
Related: How to make sure your credit is in great shape for the new year
bottom line
Remember, credit score models look at trending data (like FICO 10T and VantageScore 4.0), assessing your past credit card management habits, not just your current one. credit utilization rate. That means your credit score could drop if you rollover the balance for several months instead of paying off your credit card balance in full.
But these credit score models only look back over 24 months. If you can work to pay your credit card balance now and by maintaining that good habit every month, you can avoid potential problems in the future.
Even if you don’t plan on buying a home or refinancing right now, it’s best to work towards earning the best credit score possible. Lenders and other credit card issuers can also use credit score models to look at data for trends.
And it’s wise to always maintain good credit so you can use it when and if you need it.
