Question: My credit score has gone up significantly during the past year even though my debts and monthly payments have largely stayed the same. Are the new numbers real or am I benefiting from a mistake? Will the new numbers help me get a mortgage?
Answer: It’s no mistake. Credit report standards have changed. And yes, with a higher score it will be easier to get a mortgage.
For a very long time consumers have complained that the credit reporting system is unfair. One of the big issues was that credit reports had your personal information but you couldn’t readily see a report without cost. That problem disappeared with the establishment of AnnualCreditReport.com. At this site you can get one free copy of your credit report every 12 months from each of the three largest credit reporting companies, Equifax, Experian and TransUnion. That’s a total of three reports at no cost every 12 months.
You don’t have to get three reports at once. You can get one report every four months if you like. This will give you an ongoing look at your credit status.
Credit Scores and the National Consumer Assistance Plan
Once the public could quickly and easily see their credit reports the next battle was over content. Why did the reports include items which many felt were unfair? Medical bills, as one example, were often reported as “late” even though it was the responsibility of insurance companies to pay them.
Gradually a consensus formed that some items could be safely left off credit reports. In 2016 the three leading credit bureaus created the National Consumer Assistance Plan as part of a settlement with 31 state attorneys general in an effort to clean up credit report errors. Many of the agreed changes began showing up on credit reports this year, including the big four.
First, medical bills will only be reported as late after a 180-day waiting period. This contrasts with bills in general which do not appear on credit reports unless they are at least 30 days overdue. Also, older medical claims being paid by insurers will be removed from reports.
Second, civil judgments and tax liens — obligations which in some cases can remain outstanding for decades – will now require a date of birth or Social Security number to assure the debt is related to the right person.
According to LexisNexis Risk Solutions, the new requirements will eliminate approximately 50 percent of the tax lien data and 96 percent of civil judgments data once found on credit reports. The company estimates that 11 percent of all consumers have outstanding judgments and liens.
Third, traffic tickets and fines will no longer be reported.
Fourth, debt collectors will have to regularly update the status of unpaid debts. If the debt is no longer being pursued then it can’t be reported.
Will these changes impact your credit score?
According to the Federal Reserve Bank of New York millions of people are already seeing better scores as a result of the reporting changes.
“Between June 2017 and June 2018 – the time period during which the NCAP was implemented – the number of individuals with a collections account on their credit report fell from 33 million down to 25 million,” said the New York Fed. “The number of collections accounts reported also dropped substantially, from more than 66 million collections accounts at the end of the second quarter of 2017 to about 47 million appearing on credit reports in the second quarter of 2018. The aggregate balances reported on collections accounts also declined, by about $11 billion.”
Credit Score Impact
These changes have had some curious results according to the New York Fed.
First, about 20 percent of the credit reports with changes saw credit scores decline. This likely happened because the consumers were on such a downward path that even with the changes their scores fell.
Second, the typical increase was 11 points. Not a huge amount, but every point counts.
Third, the New York institution reports that “18 percent of affected individuals saw their credit scores increase by more than 30 points. Those who saw the largest boost to their scores were generally those with initially very low credit scores. For example, those who saw a 40 or more point increase in their score began with a 529 on average, and ended with an average of 588.”
Even with a 40-point boost, consumers with scores in the 500 range are unlikely to move into prime territory. For them, the reporting changes should be seen as an improvement but with more work required to get better scores.
The credit reports changes should be seen as positive but the old advice still remains: Check your credit report regularly for items which are either incorrect or out-of-date. Erroneous information can lower your credit score and mistakes have been noted in the past: A 2013 study by the Federal Trade Commission found that “approximately one in 20 consumers had a maximum score change of more than 25 points and only one in 250 consumers had a maximum score change of more than 100 points.”
Hopefully, with the new changes, fewer credit report errors will show up.