What New credit Score Rules Mean for You

Think you finally have credit scores figured out? Unfortunately, financial institutions are about to throw yet another curve ball your way. A new method of calculating and tracking credit history could mean changes to how Americans apply for mortgages and other loans. Thankfully, the new rules could benefit your score more than hurt it.

"Credit users may now be separated into two groups: 'transactors' and 'revolvers.'

As Reuters finance columnist Liz Weston reported in October 2015, credit reporting agencies like Equifax, Experian and TransUnion have been rolling out new formulas  for determining the creditworthiness of financially active Americans. The changes seem minor at first glance, but really represent a markedly different way of going about the business of compiling a credit score. The biggest change involves separating credit users into two groups: the "transactors" and "revolvers."

If you are someone who makes a habit of paying off your credit card balance in full each month, rarely carrying a balance or accruing interest, you are probably considered a transactor in terms of the new rules. On the other hand, if you routinely pile up interest payments on balances left over at the end of a billing cycle, you may be considered a revolver. Even if you always make the minimum payment and have never been late to pay a bill, the credit monitoring agencies may classify you a revolver and consider you a higher credit risk.

This is different from the way credit scores used to be determined, where the most important factors included total credit utilization and the average age of active accounts. While these will still play a major role in calculating a score, the new rules on how balances are handled could cause some problems for those who use credit cards to borrow, rather than as just another payment method.

Effects for mortgages

Recently, Fannie Mae also announced that it would begin using similar methods  to calculate credit scores and determine the credit risk presented by prospective homebuyers. By June 25, according to a press release, Fannie Mae will include the borrowing behavior of home loan applicants as part of the mortgage approval process. Called "trended credit data," Fannie Mae and others believe it allows for a more accurate profile of the risks presented by any given applicant.

While this update has yet to take effect, those planning on applying for a mortgage through Fannie Mae needn't fret too much just yet. For one, as Nick Clements pointed out in Forbes, these new rules currently don't apply  for mortgages through the Veterans Affairs and Federal Housing Authority programs. The trended credit data is pulled from credit cards only, not any other type of revolving credit like a home equity line of credit. In addition, the trended data will not go back further than two full years, meaning you may be in the clear if you recently adopted better credit card habits. Best of all, if you are a responsible credit user who rarely carries a balance from month to month, you may have an easier time getting approved for a Fannie Mae loan.

For those who may qualify as revolvers, however, these changes should serve as an early warning. Even if you're not planning on getting a Fannie Mae loan, or any home loan, trended data is expected to come into widespread use in the near future. That could spell bad news for those who want to have an easier time applying for an apartment, a car loan or even a job, all of which may require a credit check that now takes this information into account. It's also not unreasonable to expect this reporting metric to be used for other credit accounts besides credit cards.

If you often carry balances between billing cycles and want to get your credit in shape for a major purchase, it's certainly not too late. Clements noted that taking out a personal loan may be a good option for those who need to eliminate a hefty card balance quickly if a mortgage application is approaching. Since personal loans tend to have lower interest rates than credit cards, the right loan may make a wise investment. If you still have time on your side, however, make budgeting and saving a priority to pare down debt.

For more tips on how to spend and save responsibly, talk to the professionals at Vectra Bank.