A big change to credit scoring may be coming.

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Tens of millions of Americans have felt the financial impact of the Coronavirus pandemic, with the fallout expected to last for years even once things do get back to the new normal. From missed payments to evictions, forbearance plans to escalating interest rates, we’ve seen a lot of Americans put behind the proverbial personal finance eight ball over the last year+, often for no fault of their own.

But there may be new rules and regulations coming down from the highest office to help people who were disproportionately affected by the pandemic, including under-resourced and under-served communities.

As is, millions of thousands of banks and lenders rely on credit scores to make lending decisions to consumers every day, with the three largest credit bureaus – Equifax, Experian, and TransUnion – collecting and tracking data about our on-time payments, accounts, and much more. Together, the data is used to aggregate a FICO Score from 300 to 850 that rates the general creditworthiness (and risk) of the consumer in question.

And while these credit bureaus are responsible for the accuracy of the information they generate and report (at least on paper), the modern credit report is rife with inaccuracies, duplicates, aged-out information, and, sometimes, evidence of outright fraud of ID theft.

In fact, it’s estimated that almost 1 in 3 credit reports have some sort of error or omission that hurts the credit holder’s score, and up to 1 in 6 Americans will be the victim of ID theft, data hacking, or financial fraud this year, possibly torpedoing their credit score.

To that point, nearly 60% of complaints to the Consumer Financial Protection Bureau (CFPB) received in 2020 had to do with inaccuracies and errors on credit reports.

Of course, consumers do have an avenue to dispute any errors they feel are on their credit reports, with the credit bureaus required to officially answer their dispute within a set amount of time, either providing evidence to back up their reporting or expunging the error.

Still, the pandemic created an unprecedented gray area that’s like credit score quicksand for millions of Americans.

So, under changes proposed by the Biden Administration the Consumer Financial Protection Bureau would add a sub-agency or section that dealt specifically with adding rent and utility payments into the credit bureaus’ lending decisions. The details are still unclear, but ostensibly, by adding rents and utility bills every month as positive accounts to consumer credit scores, it would show another favorable, established tradeline and bolster their score while also strengthening their overall credit file.

That move would help to remedy the high number of people who are “credit invisible” or need some positive accounts to balance out their credit after a missed payment, collection, judgment, or other negative blemish to their credit reports.

Today in low-income neighborhoods, almost half of consumers cannot qualify for traditional loans based on current credit score models, and often resort to predatory or even illegal lending to bridge their financial gaps.

According to Christopher Willis, a partner at the Ballard Spahr law firm that helps banks work through consumer regulatory issues, “Using alternative data holds a lot of promise for the CFPB to accurately underwrite people who are ‘credit invisibles.’”

Under Biden’s CFPB plan, private firms would be held more accountable to fix inaccurate or misrepresented information on consumer credit reports.

Any stout changes to the CFPB and credit scoring still would need congressional approval, but it’s a plan that’s likely to pass in some shape or form as a response to the changing face of personal finance in America as we set our sights on a post-pandemic world.

 

 

 

 

 

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