Recent pressure from the Consumer Financial Protection Bureau (CFPB) prompted the three major credit bureaus to adjust how the companies report data found in public records. Beginning in July 2017, Equifax, Experian, and TransUnion will no longer include tax liens and judgments unless they meet much stricter criteria than currently used. The move comes as a continued effort to improve credit reporting accuracy.
For years, consumers have complained that credit reports contained damaging errors, making it difficult for consumers to get loans. The process of disputing errors has traditionally favored the reporting company. With over 8 million consumer complaints in 2011 claiming that errors exist on credit files, 31 State Attorney Generals filed lawsuits against the credit bureaus. They challenged the use of public data, the dispute process, and other procedures that hurt consumers and made it difficult to correct mistakes. The settlement, reached in 2015, led to significant changes in credit bureau reporting practices, and helped consumers clean up errors found in reports.
Although the three major credit bureaus addressed the issues presented in the lawsuit and successfully changed how they report consumer information, the CFPB insisted they must do more. Now they will again adjust reporting policies and practices, which will lead to additional changes that could benefit millions of consumers.
Upcoming Changes in Credit Reporting
A credit report contains information from two major sources: Data reported by companies associated with lending and information found in public records. Each month lenders and companies send payment histories to credit bureaus, which aggregate that information in a report creating the credit file. The bureaus also track data available in public records, matching that information with consumer records.
A recent CFPB report argued that the information found in most public records is incomplete, to the extent that the credit bureaus could not accurately discern which accounts belonged to specific consumers. They also pointed out that these records are not updated frequently enough to provide timely and accurate information on the corresponding credit file.
As a result, starting in July 2017, tax liens and judgments must contain the customer’s name and address along with either a birth date or social security number. Failure of an account to contain at least three of these four pieces of information will lead to the omitting of the data from consumer reports. New rules will also require the reporting company to update the public records at least every 90 days. Given that most current judgments and tax liens do not meet the new standards required for credit bureau reporting, FICO experts estimate that up to 12 million consumers will see a jump in credit score this summer.
What Information Do Credit Reports Contain?
Credit agencies collect data rather than evaluate it. They consolidate information related to customer borrowing habits, much like Expedia gathers travel information so consumers can compare prices across different airlines and hotel chains. Lenders, collection companies, and other organizations report the payment track record to the credit bureau, which then compiles information into a single report. The same companies then order and buy reports when a prospective customer completes an application, which considers credit as a criteria.
Credit files contain a record of borrowing money which includes a payment history, current credit balances, line of credit limits, late payments, and other data used to evaluate a consumer’s responsibility with credit. A credit file will also include account delinquencies, which could include an overdue power bill, defaulted credit card bill or unpaid student loans.
Changes in the last few years have improved credit reporting accuracy and eased the dispute process when a consumer identifies errors. Credit bureaus can no longer assume companies report data correctly. When a consumer challenges information, companies must provide proof of the debt and delinquency in a timely manner.
Other changes include the elimination of public records for non-contractual debt, such as gym memberships and traffic tickets. Medical debt receives special treatment because insurance companies often pay slow, damaging credit without reflecting a consumer’s level of repayment responsibility. Most recently, debt settlement agreements can eliminate the debt from a credit file after completing the agreed repayment schedule, even if the customer does not pay the debt in full.
Who Uses Credit Files
In addition to lenders, insurance companies, utilities, employers, and service providers, now use credit files and credit scores to evaluate applications. With credit reports and credit scores moving well beyond its initial intended use, accuracy becomes far more important.
How Changes Will Impact Credit Scores
Credit scoring companies such as FICO use the information found in credit reports to calculate a three-digit score, which represents a consumer’s ability to repay future debt. The parameter is a very important score lender’s use to evaluate an application. In some cases, like a credit card application, the credit score is the primary piece of information used in the credit decision. Other times, lenders evaluate additional data such as job history, residency, savings, and collateral used to secure the loan. Adjusting the reported information will also adjust the consumer’s credit score.
The leader in credit scoring, FICO, estimates 700,000 consumers will experience a score increase over 40 points, where the majority will experience less than 20-point increase in the same time period, impacting as estimated 12 million credit files.
Credit files will continue to report any late payments, delinquencies and defaulted accounts for seven years from the date of the first delinquency. There will also be no change in the reporting of bankruptcies, which typically remain in a credit file for ten years.
With the importance of credit in many aspects of a consumer’s life, accurate reporting becomes paramount. With legislative pressure, judgments and tax liens will not appear on credit files unless it is clear the delinquency belongs to the right customer. These changes could open the door for some consumers to get a new start with rebuilding their credit.