Proposed credit scoring changes could benefit millions of Americans
Since its inception in 1989, there have been few, if any, changes to credit score reporting. However, with advances in technology and an economy struggling with a global pandemic, it makes sense to reassess a system that can determine where someone lives or works.
And that is what is happening. Congress is now considering significant changes the thirty-two-year-old process for restricting certain uses of credit scores, such as consideration for employment or housing. Also in review are changes in time and the types of debts included. For example, medical debt would be reported differently from other debts. It is also proposed to report rent and utility payments to help those with little or no credit.
One of the biggest changes is who would be in charge of credit reporting. Currently, three private companies provide reports. These companies are Equifax, Experian and Transunion. One proposal calls for the creation of a government agency to create reports. Keep reading for more information on credit score reports and how it might affect you.
Prohibit the use of credit information for employment or other purposes
Under the new guidelines, employers would no longer be allowed to use a credit score to determine eligibility for employment. Other businesses that use credit reports are utilities and insurance companies. Some states do not allow insurance companies to use credit information for policy-making purposes. If these changes occur, it could affect how insurance companies charge consumers for policies.
Reduced time information is included
Now, overdue accounts remain on the report for seven years. Under the new proposal, the information would only remain in the report for four years. However, bankruptcies could still be reported for seven years.
Amended Medical Debt Guidelines
Debts incurred for medical reasons can no longer be reported under the new rules. Or if so, it may not be registered for a year after the charges so that the debtor can have additional time to settle the debt.
If a consumer had a good credit history up until the pandemic but fell behind on their payments due to job loss during the pandemic, the new system will not penalize them for late payments or any debt. accumulated during this period.
Add subscription services, rent payments, and utilities
In the future, subscription services like Netflix may be used on your credit report to determine solvency. Experts believe that adding these services would give a better overview of credit history. Especially for people who may be roommates or who rely on ride-sharing services instead of buying a car.
The new FICO 10 report
In 2020, the Fair Isaac Corporation announced that they would start taking into account the level of consumer debt when calculating a credit score. As a result, 110 million consumers could see their scores evolve, and not necessarily for the better. New debt, not paying on time, or taking out personal loans that lenders may consider riskier loans because there is no collateral associated with the loan, could result in a downgrade of at least twenty points. FICO estimates that 80 million people could be affected by this change. Not all lenders will use this model. Some will continue to use FICO 9, which was released in 2014. Consumers can offset these changes by continuing to pay their bills on time, being cautious when taking out personal loans, and keeping their balances low.
Advantages and disadvantages of the new guidelines
- There is no clear idea how it would work.
Removing the process from the three companies that handled the reports would leave the government responsible for millions of documents. Who would control all this information, and how? These questions have not been answered.
- This could make it easier for young people to obtain credit.
In the past, getting credit was a catch-22. Without the ability to obtain credit, and therefore a credit score, banks and creditors have been reluctant to lend to people without credit. Having more sources of supply will make it easier for people to accumulate the credit they need to buy a house or a car.
- This could make it easier for minorities to get credit.
While a credit score was meant to level the playing field for credit, history has proven that hasn’t always been the case. However, changes to these guidelines could make credit more accessible to everyone.
When could these changes take place?
The Global Credit Law and the Protecting Your Credit Score Act of 2021 both passed by the House of Representatives and are currently under consideration again. And the current administration is in favor of passing a bill to overhaul the credit reporting system.
What you can do now to maintain a good credit rating
A lack of financial literacy has kept some people in the dark about credit scores and how they are generated. For example, paying off your debts could lower your score, which could be detrimental if you plan to buy a new home. Here are some things you can do to maintain a good credit rating:
- First, pay your regular bills on time.
- Keep your credit card balances low. The higher the balance, the lower the score.
- Limit requests for new credit. Too many requests will lower your score.
- Closing your credit card accounts can lower your score.
- Fourth, be sure to check your credit report for inconsistencies or identity theft.
- Budget and target set.
Although it seems very likely that credit reports will change, there is no set timeline yet. As Congress and the House meet to discuss these bills, more information will become available.