The three major credit reporting agencies have announced a substantial improvement in their credit reporting metrics which may both boost credit scores for millions of consumers and cause potential problems for lenders.
Credit Reporting Modification May Increase Scores
The Consumer Data Industry Association, a trade group representing credit reporting companies said late Monday that the three major companies that provide credit data, Equifax, Experian, and TransUnion, will soon remove tax lien and civil judgment data from some consumer credit records. The removal will impact most such existing data and, going forward, the way in which new data has to be reported from the source.
Starting July 1, public records data must include three of four data points, the consumer’s name, address, and either a social security number or a date of birth. Existing records that don’t meet this criterion are going to be purged from the consumer record and new data that doesn’t include these points will not be added. Many liens and most judgments don’t include the three or four pieces of information.
This change will not only eliminate negative information from the record but should ultimately lead to raising many credit scores. Both the reports and scores are instrumental in lender decisions about whether or how much consumers can borrow for auto, home, and other major purchases as well as the rate of interest they will pay.
FICO, which supplies credit scoring, estimates that there will be an improvement to around 12 million consumer scores, about 6 percent of those consumers with such scores. For most the boost to their scores will be modest, probably under 20 points.
It appears that the modifications announced by the credit reporting companies are at least partially as a result of a recent report from the Consumer Financial Protection Bureau (CFPB). CFPB is the first government agency to oversee credit reporting and has been critical previously of several of the firms’ quality control functions as well as the manner and efficiency in addressing consumer complaints and errors in credit records. A report issued earlier this month found substantial improvement during the last several years but additionally noted a need for additional development and formalization of corrective actions on the part of some. Specifically noted was the need for improving standards for public record data. In another monthly report, CFPB also noted that credit reporting continues to account for the largest share of consumer complaints the agency receives.
The Wall Street Journal reports that settlements of lawsuits derived from various states have already pushed the credit reporting companies to remove some categories of negative data from reports such as information associated with library fines and gym memberships, and required changes to the timing of medical collections information.
There are fears that the change in reporting negative public records information could pose potential risks for lenders as they attempt to accurately predict borrowers’ creditworthiness. The Journal quotes information from LexisNexis Risk Solutions, that provides such information to the credit bureaus and to lenders. They maintain that consumers with liens or judgments are two times as likely as others to default on loan payments.
The paper also quotes John Ulzheimer, a credit specialist and former manager at Experian and credit-score creator FICO who says, “It’s going to make someone who has poor credit look better than they should,” said “Just because the lien or judgment information has been removed and someone’s score has improved doesn’t mean they’ll magically become a better credit risk.”
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