Warning: Your Credit-Card Score Is About to Change

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Miles, points, cash back. Take your pick: Credit cards can be rewarding in any of several ways, depending on your spending habits and your goals. The right choice? That's a complicated conversation, and an ongoing one, since individual consumer variables are in constant flux, as are the cards themselves.

Obviously, picking the right cards is important. But so is using the chosen cards responsibly, because card management is a key factor in formulating the credit score used to determine whether to issue you additional cards, what those cards' credit limits should be, and so on.

Credit-card management can be either a virtuous or a vicious circle. Get a card; use it wisely; get approved for more cards or higher limits on existing cards. Or, get a card; use it irresponsibly; have applications for additional cards declined or the spending limit lowered on current cards.

For savvy consumers interested in maximizing the value of their rewards cards, it's important to know how credit-scoring companies assess their activity, both today and in the future. And indeed, the scoring rules are set to change....

New Credit Card Scoring Rules

VantageScore, a company jointly created and used by the Experian, TransUnion, and Equifax credit bureaus to rate consumers' credit, will introduce a new and novel scoring model, dubbed VantageScore 4.0, this fall.

Most noteworthy in the new scoring approach is the use of trended credit data that "reflects changes in credit behaviors over time, in contrast to the static, individual credit-history records that have long been available in consumer credit files."

So, for example, rather than relying on a snapshot-in-time of the ratio of a consumer's credit limit to his credit usage, the new model will focus on whether over time a consumer is paying down his credit-card debt, or allowing it to mushroom. Those reducing their debt will be rewarded with higher scores than those whose debt level is increasing.

A byproduct of the new approach is that consumers with high credit scores and multiple cards with a high combined spending limit will come in for increased scrutiny, and may have their scores lowered. That's because the high spending limit will now be considered a red flag, due to the increased potential to accumulate unsupportable debt.

One takeaway: Rather than keeping unused card accounts open, as has been the recommended procedure under the current scoring model, you will benefit from closing inactive accounts and reducing your spending limits.

Another takeaway: Even if you can't afford to pay off your outstanding card balance every month, establishing a history of incrementally reducing your outstanding debt will improve your score, and is therefore worth making a priority.

Another upcoming change is the elimination of civil judgments, medical debts, and tax liens from the scoring calculation. Reports of those factors were found to be error-prone, and thus led to inaccurate overall assessments. Since such incidents can only negatively affect scores, their exclusion should result in slightly higher scores for any cardholders who have such incidents in their financial backgrounds.

VantageScore is not used by most mortgage lenders, which instead rely on FICO credit reports. But it's reasonable to expect that FICO will at some point follow VantageScore and incorporate trended data into its scoring model as well.

The upcoming changes serve as a reminder that earning credit-card rewards responsibly requires an understanding of the rules governing credit, both as they exist today and as they will be tomorrow. Know the rules, manage your credit-card accounts accordingly, and earn, earn, earn.

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