This morning, we are answering listener questions!
We are. A number of your loyal listeners have sent in their questions about money matters, and we are here today with some answers!
The first question here is about a recent change to a major credit score. Can you tell us about this?
Absolutely! Recently, VantageScore – co-owned by Experian, Transunion and Equifax – announced a change to its scoring process. Though not as well-known as Fair Isaac’s FICO score, the VantageScore plays a huge role in the credit industry, and was used in 8 billion account applications last year.
The new process will emphasize the trajectory of a borrower’s debts on a month-to-month basis, using a process referred to as trended data. This means a person paying down debt more rapidly is now likely to receive a higher score than a person who is making minimum monthly payments but slowly accumulating debt.
It also looks at a borrower’s overall debt potential. The old system used your debt to available credit ratio as a key indicator of risk in your overall score. Under this system, a person with $5,000 in credit card debt with a $50,000 limit would score better than someone with $2,000 in debt on a $10,000 limit. Now, having excessively large credit card limits will hurt you.
Finally, the new Vantagescore system will remove civil judgments, medical debts and tax liens from the equation, following a 2015 agreement between the three credit bureaus and 31 state attorney generals. The reason the new score does not take these debts into account is because they are frequently inaccurate. For example, medical expenses charged on your credit card may not reflect insurance reimbursement for a given period, driving up your available credit to debt ratio.
How will it impact us?
The new process means your VantageScore will reward you for responsible financial practices. Now, your vantagescore will more accurately reflect your money habits, regardless of your overall income. One big benefit: you can forget the old maxim about not closing old card accounts out of concerns about it damaging your credit score, because it is about your potential to run up debt, rather than your ability to obtain credit lines in the first place.
The biggest impact will be felt when you are applying for credit cards. If you maintain low balances and pay off debt, rather than racking up more and simply maintaining it, you will be rewarded in the Vantagescore system with a higher score, and as a result, with lower interest rates.
And you will be punished for holding high amounts of debt, rather than rations of debt to credit, with a lower score. However, it is important to note, your new Vantagescore – good or bad – will be confined in most cases to plastic. Any mortgage application you submit is unlikely to be affected, because mortgage companies Fannie Mae and Freddie Mac require a FICO score and play such a large part in the mortgage market. Few mortgage lenders use VantageScore.
Our next question is from a listener asking about loan options for those in the armed services. Are there options for someone who is currently serving?
If you are currently serving, the Department of Education allows you to defer your student loan payments during active duty and 13 months after your return. The government will pay the interest on your Perkins or Stafford loans during this time, and your principal balance will not grow. It is a great program to take advantage of if you are in the armed forces.
What about veterans? Are there repayment or forgiveness programs specifically for those who have left the military?
There are! First, past service to our country qualifies borrowers for the Public Service Loan Forgiveness program. This program forgives all student loan debt after 120 consistent payments made after October 1, 2007 while working full-time with the military or another qualifying non-profit. One thing to keep in mind: the 120 payments do not include any months of deferment.
Additionally, the National Defense Student Loan Discharge is designed to help those who have put their lives on the line for their country. This will forgive federal student loans. To qualify, you must have served at least one year in an area deemed imminent danger and/or in direct fire and have a Perkins or Direct student loan. Finally, the veterans total and permanent disability discharge can defray your loans. To qualify, the Department of Veterans Affairs must certify that you have a service-related permanent disability.
Mellody is President of Ariel investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.