Credit Scores Going Up … Without Any Help From Consumers

    The average credit score for American consumers is at an all-time high, but will almost surely go higher within the next year as credit bureaus and government tinker with one of the key components in the economy.

    Fair Isaac Corporation (FICO), the most recognized name in the credit score industry, said the average consumer’s score is 692, up one point from 2013 and six points better than the all-time low of 686 recorded in October of 2009. Credit scores range from 300 to 850. Anything above 720 is considered very good and anything over 750 is excellent.

    FICO recently announced that it was tweaking the algorithm it uses to arrive at that score to put less emphasis on medical debts that went to collection agencies. More than 60 million consumers have a medical collection on their credit report.

    The company says that consumers whose only major negatives are medical collections, should see their score increase by 25 points, though it may not happen for 6-8 months while lenders adjust to the new scoring model.

    “What we found through research was that when the only negative is medical collections, that is typically an anomaly,” Anthony Sprauve, senior consumer credit specialist with FICO, said. “It’s not really indicative of a consumer’s ability to pay so the new score won’t penalize them as severely as it did before.”

    That’s one step in the right direction, but California Congresswoman Maxine Waters wants to add a few leaps. Waters introduced a proposal to the House Financial Services Committee on Sept. 10 that would make the credit bureaus and reporting agencies more responsible for the accuracy of the information they use in setting consumer credit scores.

    The Federal Trade Commission estimates that 40 million consumers have errors on their credit reports. ConsumersUnion, a policy and action division of Consumer Reports magazine, said that 10 million people had errors severe enough that they would have to pay a higher interest rate on their loans.

    “A person’s credit report is too important in determining access to a wide array of opportunities for these reports to contain inaccurate and incomplete information,” Waters said in an email response to questions about her bill.

    Waters’ proposal also would require consumer reporting agencies to remove any information related to fully paid or settled medical debt from a consumer’s credit report within 45 days. The proposed bill would remove any negative information after four years. Currently, negative information is retained on a credit report for seven years.

    “People can choose when to shop and buy certain commercial goods but they cannot plan when they are going to be sick and need medical care,” Waters said. “If a consumer fully pays or settles a medical debt, the consumer should not continue to be arbitrarily penalized. The information should be removed from a credit report once it is fully settled or paid.”

    That one likely will get push back from FICO and the three major credit bureaus, which include Experian, Equifax and TransUnion. FICO’s credit score is the most popular one used by lending institutions. The other three bureaus combined to create their own score, known as the Vantage Score.

    Two of the key elements in calculating a credit score are whether the consumer pays on time and how long of a history of paying they have. In other words, paying bills for seven years counts for more than paying bills for four years.

    Credit scores are used by lenders to help determine the likelihood that a person will repay a loan. Other factors go into the final decision on whether to loan someone money, but the credit score carries significant weight, especially in determining the interest rate a consumer pays on a loan.

    “We think our current system is an unbiased way of looking at a person’s credit history and predicting future behavior,” Sprauve said. “This bill recommends removing negative information without validating how it will predict a person’s ability to pay in the future. We are concerned about that.”

    One area the two sides do agree on is reducing the consumer’s cost for a credit score. Consumers can get credit reports free, but the score typically costs somewhere from $15-$20 and could be higher.

    Waters proposal caps the cost for a credit score at $10. Sprauve said FICO is working with credit card companies and lenders to provide credit scores for free.

    “We are committed to the concept of making FICO scores available for free,” he said. “We believe the best way is for consumers to get their score free from the lenders they have a relationship with. That way, the score they see is the one the lender uses in making a decision and is most relevant to them.”

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