Amidst all of the news this week, one potentially groundbreaking piece of legislation seemed to be slipping under the radar: the idea of a radical overhaul of America’s credit reporting industry.
“Good credit is a gateway to wealth,” House Financial Services Committee chair Maxine Waters, D-Calif said Tuesday. “Yet for too long our credit reporting system has prevented people of color and low income from accessing capital to start a small business, accessing mortgages to owning a home, and accessing credit to deal with financial emergencies. “
Waters added that the House had passed two bills in committee before the pandemic – the Comprehensive Credit Act and the Protection of Your Credit Score Act of 2021 – which “provide for long overdue reforms to our credit system. ‘credit assessment’.
Both bills are back under consideration.
During Tuesday’s hearing, Waters and his committee heard from consumer protection advocates like Chi Chi Wu of the National Consumer Law Center, who proposed replacing the private three-credit bureau system with a public registry of credit. It would operate under the aegis of the Consumer Financial Protection Bureau, which protects consumers against unfair or abusive practices.
“Although public agencies are not perfect, at least they wouldn’t have profit as their top priority,” Wu told the House Committee on Financial Services during his testimony. “They would be susceptible to public pressure and government scrutiny. They could also be tasked with developing credit scoring models to reduce the yawning racial and economic inequalities in this country.”
Wu added, “The fact that these are private for-profit companies is why credit bureaus are constantly expanding their products to uses, such as employment, insurance and tenant screening, which end up harming Americans and contributing to massive inequality in our nation. “
Waters noted that creating a consumer-focused credit reporting agency “would be a major improvement over today’s flawed and biased credit reporting system.”
In addition to the Single Credit Bureau idea, Wu also proposed several other policies that, if implemented, could improve the financial lives of Americans struggling to improve their credit scores and financial lives:
- Prohibit the use of credit score information for purposes unrelated to credit decisions. This means that most employers would no longer be able to use credit reports in their candidate screening process.
- Reduce the length of time negative information stays on your credit report. Information such as missed payments and collections would fall after 4 years instead of 7. Bankruptcies would continue to last for 7 years.
- Limit the declaration of medical debts. They would ban the reporting of medical debts for medically necessary services and delay the reporting of unpaid medical bills for a year to give you time to resolve issues with hospitals and insurance companies.
- Protect the economic victims of COVID-19. Lawmakers hope to put a moratorium on reporting negative information incurred during the pandemic and other disasters.
To illustrate the impact of COVID on consumer credit, Waters shared a story:
Last week I received a letter from a gentleman in Ohio. In that letter, he explained how he lost his job due to the pandemic. Without his salary and without the help of any of his creditors, he could not afford to cover all of his bills. Although he has never missed a credit card payment before, his credit score suffered so much that he wrote – and I quote – “I couldn’t get credit now if I paid someone for it. give me credit. “. He closed his letter by asking what this committee was doing to protect consumers like him.
How things work now
Currently, Americans have multiple scores from each of the three major news bureaus. Scoring models vary in how factors are weighted more heavily, but all credit scores are used to gauge a person’s ability to manage credit and debt. They are used to decide who gets a car or home loan, credit cards, an apartment.
These factors include:
- Payment history (Are you always on time or late to pay your bills?)
- Use of credit (How much of your total credit are you currently using?)
- Length of credit history (How long have your credit cards and loans been open and are they in good standing?)
- New credit (How frequently have you applied for credit lately?)
- Credit mix (Do you have a variety of credits, such as loans and credit cards?)
The goal: eliminate errors, ensure fair practices, end confusion
Correcting errors on a credit report (not to mention the 3 versions) can be a Byzantine system of filling out forms and making phone calls.
“The fact that their customers are creditors and other users of information explains the unacceptable error rates and the bias against consumers complaining about errors,” Wu argued, adding that “if consumers do not are unable to get legal recourse for the Fair Credit Reporting Act (FCRA), a key enforcement tool goes missing, making the faulty credit reporting system much, much more difficult to repair. A public credit registry would replace or provide an alternative to this flawed system. “
Wu and Waters both referred to a recent Supreme Court ruling, which narrowed down the case brought by an Arizona man who successfully sued Transunion for repairs after a dealer’s credit check. automobile wrongly reported him as being on a terrorist watch list.
But even smaller mistakes can cost you money in the long run in the form of higher interest rates on mortgages and auto loans – or possibly seeing a mortgage or rent application turned down, even if you meet the requirements. income conditions.
Crucial FICO Scores Need Updates
In order to help consumers protect their credit during the pandemic, bureaus have extended the availability of free credit reports until 2022. However, these reports typically do not include your FICO scores. The ones you usually have to pay the credit bureaus for – especially if you want to see which ones will be used when you go to buy that home or car and get a sense of what rate you’re eligible for.
Another problem with mortgages: Although the FICO and Vantage scores have been recalibrated to reduce the impact of medical debt, they are not the ones used by Fannie Mae and Freddie Mac during the mortgage underwriting process. So, to streamline the process, many lenders use the same less forgiving 5 (Equifax), 4 (Transunion), and 2 (Experian) FICO scores and often take your average score. And again, these are scores that consumers typically have to pay to see. They are also used to assess rental requests.
Your credit score also has an impact on your auto insurance payment, determining if you can afford to drive that car to get to work. It might even be a determining factor in whether you get that job.
“It’s basically the toll of a consumer’s financial life,” Wu said. “Yet for such an important matter, credit reports and credit scores suffer from serious problems and abuse.”