Many of us are all-too-familiar with our credit report, that detailed chronicle of your credit history. Credit bureaus compile this information, then your potential lenders use the reports to determine your creditworthiness for taking on loans and other debt.
Your credit report has always revealed things like whether you’ve been late on payments or whether you’ve defaulted on a loan. Seems like there’s plenty of information to be out there about you, right?
But this Saturday – September 24, 2016 – will see the information in a credit report tackled from a slightly different angle. Your credit report will now be answering the question: how have you been managing your debt?
Lenders will learn extra details about your habits, like what you paid on your balances from one month to the next over extended periods of time. They’ll be delving into any patterns or trends when it comes to how you manage your money.
New Credit Report Terms: Transactor vs. Revolver
If you’ve never heard of terms like “transactor” and “revolver,” it’s because they’ve never been very important until now! But this year they’re becoming incredibly important to millions of potential borrowers. Depending on which camp you fall into, it may even dictate whether you qualify for a mortgage at all.
If you’re a transactor, you pay off your revolving credit bills each month. While this demonstrates financial responsibility, the current system isn’t set up to reward this behavior because only the credit limit and the amount of credit used are taken into consideration.
If you’re a revolver, on the other hand, most of the time you make the minimum payment on your revolving credit. You simply roll your balances over to the next month. The credit industry has done its research and they’ve long known that, statistically, revolvers are far more likely to default at some point in the future, especially when those substantial unpaid balances are piling up. Transactors tend to be lower risks.
So what’s changed? Mortgage lenders and investors have always had difficulty differentiating the revolvers from the transactors. A person’s credit report could let them know whether an applicant is typically late on credit card payments or has defaulted on other loans, but they had no way of knowing exactly what was paid on the balances each month over the long haul.
The Move Toward Trended Credit Data
This Saturday, mortgage market powerhouse Fannie Mae will show trended credit data – looking into how all loan applicants have managed their credit over the last two years. They’ll learn how much revolving debt you owe each month, the minimum payment allowed on each debt, as well as how much you actually paid.
Meanwhile, two of the three national credit bureaus — Equifax and TransUnion — will supply two years’ worth of continuous, month-by-month data on the credit management patterns of millions of loan applicants.
What Will This New Method Mean To You?
It benefits borrowers who regularly pay off debt and it should also provide a greater number of creditworthy borrowers access to mortgage credit.
This is great news if you’re in the earlier stages of building your credit history! You may have once been considered “unscorable” because there wasn’t enough data to create a reliable credit report. But by adding credit usage data into their reports, you could potentially qualify for reduced interest rates from lenders.
Bottom Line: It’s a Huge Step Toward Fairer Credit
As a hopeful borrower, the way you manage your credit could now become the key factor. Consumers who pay their bills in full will reap the benefits while those who play games with credit cards will warrant a harder look.