Cleaning Up Credit Reports
In April, we reported on the upcoming rise in credit scores thanks to the National Consumer Assistance Plan (NCAP). The NCAP was created by the three major credit bureaus (Experian, Equifax, and TransUnion) as part of a settlement with state attorneys general. The NCAP objectives and other actions by the bureaus to clean up credit reporting errors was expected to raise some Americans' credit scores by 15 to 30 points on the FICO scoring scale.
A recent report from the New York Federal Reserve confirms these estimates. According to the Fed's analysis of anonymized Equifax credit reports, eight million Americans had at least one collections account removed from their credit report – resulting in an average 11-point increase in their credit scores between June 2017 and June 2018. Overall collection account balances have been reduced by $11 billion.
Some Winners, Some Losers
The average credit score increase may have been 11 points, but the distribution was quite wide. Almost 20% of those having a collections account removed from their report saw a decline in their credit score instead of an increase. That's not surprising – if you've had an account in collections, you're more likely to have other financial problems that could adversely affect your credit report.
Just over one in five Americans saw a 1-to-9-point increase in their credit score from last June to this June, while 18% saw credit score increases of 30 or more points and approximately 12% saw increases of 40 points or more. Most of those with greater increases started out with lower credit scores – exactly the population that needs the most help. The group with increases of 40 or more points started out with an average 529 score and ended with an average of 588 – an increase of well over 10%.
For those with fair credit scores, the changes could open new opportunities. According to the Fed report, 20% of consumers who had scores below 620 have been raised above that mark by the changes – possibly bridging the gap between loan denial and approval.
Don't Get Complacent
Before you get too excited about your good credit score fortune, remember that this effort is a one-off adjustment to credit-reporting practices. Adjustments that were not mandated by the NCAP were triggered by a 2017 study by the Consumer Financial Protection Bureau (CFPB), which found limited oversight of damaging third-party public records and multiple cases of information assigned to the wrong person.
Bureaus are requiring more stringent personal identifying information (PII) to place these events into a credit report – which means that third-party debt collectors and other groups reporting to the bureaus will step up their game. The Fed expects the reporting of collection accounts to increase in the future as creditors start getting better at gathering the necessary PII to make a collection account verifiable and reportable.
In other words, you got a free pass this time – but you may not in the future.
To keep your higher credit score, it's extremely important to avoid missed payments and delinquencies that would put you in collections. Making payments on time is the number-one factor that determines your credit score, followed by credit utilization (the amount of your available credit that you are currently using). Focus on these areas, and you may see yet another increase in your score – making you eligible for better loans and/or better terms on existing debts.
If your credit score increased because of the changes by the credit bureaus, congratulations – but don't use the change as an excuse to indulge in more spending. Take advantage of the changes and use them to create positive financial momentum.
You can't expect positive changes from the credit bureau every year without any effort on your part. What can you do to raise your credit score even further over the next year?
Start by reviewing your credit report. Look for any errors or fraudulent use of your account that could be dragging down your credit score without your knowledge. Take immediate action to correct any errors and/or deal with fraudulent use of your credit. You can check your credit score and read your credit report for free within minutes by joining MoneyTips and using our Credit Manager tool.
Review your budget (and if you don't have one, make one). Make sure that your spending is under control and that all bills are paid on time. Shop around for a different credit card to see if you qualify for a better interest rate with your higher credit score – or better yet, don't charge more than you can pay off at the end of each month. Interest rates then become irrelevant. If you want more credit, check out our list of credit card offers.
If you saw little or no change in your score, or even a decline, the same message still applies. Your task is tougher because you're trying to create positive financial momentum, so it's even more important for you to make the necessary changes in your budget.