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The Bill That Could Radically Improve Your Credit Score

By Danielle Douglas, The Washington Post

The top Democrat on the House Financial Services Committee is proposing sweeping changes to a law that governs the way lenders report consumer payments to credit bureaus. The move could help millions of Americans get better interest rates on mortgages, auto financing and student loans.

Rep. Maxine Waters (D-Calif.) plans to introduce the Fair Credit Reporting Improvement Act of 2014 on Wednesday to update the 44-year-old consumer protection law with nearly 20 new provisions or fixes. Chief among the changes are proposals to shorten the amount of time that black marks remain on a credit report from seven to four years, remove all settled debts from the report and erase private student loan defaults for borrowers once they make nine consecutive, on-time payments.

“It is an issue that has been ignored for too long,” Waters said in an interview. “The time has come to straighten out the complaints and the problems of the credit reporting agencies.”

Yet there is concern that Waters’s attempt to reform credit reporting could ultimately undermine the process. Removing any adverse debt from a report within 45 days of it being paid or settled, as the bill proposes, could make a reckless borrower appear to be a good credit risk, said John Ulzheimer, a credit expert at Credit Sesame, a consumer credit Web site. Ulzheimer worries that unilaterally removing all debt in collections that have been paid would erase information needed to assess the risk in extending credit, leaving lenders vulnerable to defaults.

“This is a little bit dangerous,” he said. “If you’re in debt for $50,000 and it’s all over your credit report today, it sits there for seven years. If this were to become law, you could settle it for $5,000 and it’s all gone; essentially you’d have a $45,000 discount and a clean credit report.”

The methodology behind credit reporting and scoring has taken centerstage as lawmakers and consumer advocates have questioned whether it has unduly hindered Americans from access to affordable loans.

Credit scores, which are based on a 300- to 850-point scale, are calculated using information from reports that are generated by the three major credit bureaus: Experian, Transunion and Equifax. The scores aim to measure the likelihood that a consumer would repay a debt based on his or her record. Given the widespread use of the scores, even small discrepancies can have huge consequences, including high interest rates on loans or flat-out denial of credit.

For years, advocacy groups have questioned the accuracy of the reports and the ability of borrowers to have disputed information removed. Problems in the reporting process have been brought to light by a series of studies released by the Consumer Financial Protection Bureau. A report issued in May questioned whether medical debt, which accounts for more than half of all unpaid debt in collection, should factor into credit scores.

Unlike other types of debt, medical bills are typically the result of unpredictable and pricey events that are not always immediately covered by insurance. The CFPB found that people saddled with such debt had otherwise good track records of paying their bills on time, leading the bureau to conclude that unpaid medical debt was not a clear indicator of credit risk.

After that report came out, Waters sent a letter to House Financial Services Committee Chairman Jeb Hensarling (R-Tex.), requesting a hearing on the state of the credit reporting system. On Wednesday, the committee will hear testimony from academics, consumer attorneys and industry representatives on the issue. Waters commended Hensarling for holding the hearing, but said none of her colleagues across the aisle have given explicit support for the bill yet.

It’s been a decade since any substantial changes have been made to the Fair Credit Reporting Act. The last major amendment to the law gave consumers the right to one free annual credit report and directed mortgage lenders to provide credit scores to borrowers, among other things. Little has changed since then.

“It’s been years and years of complaints and reports to build all of the evidence to make the case that a lot of reform that’s needed,” said Chi Chi Wu, an attorney at the National Consumer Law Center.

There have been some attempts by private actors to improve the system. Last month, Fair Isaac Corp. (FICO), creator of the most widely used credit score, announced a new version of its scoring model that would no longer factor in past-due payments that have already been made or give medical debt much weight in its calculations.

While Waters considers FICO’s decision to be an important step forward, she said it is not comprehensive reform. A piecemeal approach to reform could drag out the process to the detriment of consumers in need of a mortgage, car, student loan or even a job.

One provision of Waters’s bill seeks to bar companies from using credit checks to weed out job applicants. Advocacy groups and lawmakers say the practice contributes to long-term unemployment and disproportionately affects women and minorities whose credit was damaged during the financial crisis. Sen. Elizabeth Warren (D-Mass.) was one of seven lawmakers to sponsor a bill to end the practice last year, but the Equal Employment for All Act stalled in committee.

Waters hopes to get the Senate to introduce a companion version of her bill.

Key provisions of the Fair Credit Reporting Improvement Act of 2014:
  • Providing relief to millions of borrowers who were victimized by predatory mortgage lenders and servicers, by removing adverse information about these residential loans that are found to be unfair, deceptive, abusive, fraudulent or illegal.

  • Ending the unreasonably long time periods that most adverse information can remain on a credit report,shortening such periods by three years.

  • Giving consumers the ability to verify the accuracy and completeness of their credit reports, by mandating that furnishers retain all relevant records for as long as adverse information remains on a person’s credit report.

  • Eliminating punitive credit scoring practices by removing fully paid or settled debt from credit reports, including medical debt, which has been found not to be a reliable predictor of a person’s creditworthiness.

  • Giving distressed private education loan borrowers the same chance to repair their credit as federal student loan borrowers, by removing adverse information when delinquent borrowers make nine consecutive, on-time monthly payments on their loans.


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