About one in five American users can see them.Get the jump this fall thanks to the final phase of a three-year-old legal settlement. And it could allow millions of people to get low-cost loans and lower their insurance premiums.
Starting in September, credit bureaus will be barred from adding medical debt collections — which affect the credit scores of about 20 percent of all Americans — if the debt is not at least six months old. Additionally, if the medical debt is ultimately paid by insurance, any delinquency reports must subsequently be removed from the consumer’s file.
This changes with July., millions of consumers can see significant improvements in their credit scores. What exactly is happening and how should you react? Here are the answers to your questions.
Why are these changes being made? In 2015, three major credit reporting companies – Equifax, Experian and Trans Union – settled a lawsuit by a group of state attorneys general who claimed that inaccurate credit reports were harming millions of consumers. Without admitting wrongdoing, the companies agreed to make a number of changes that would reduce the number of “mixed files” (the credit reports of people with similar names being tainted by credit slurs). And there will be a number of procedural changes aimed at improving the value of loans. Validity of these reports The final part of this agreement will come into effect on September 15.
How do these changes affect credit scores? Credit reports are different than credit scores. However, each credit score is calculated based on the information provided in the consumer’s credit report. Fair Isaac, purveyor of the ubiquitous FICO score, has already changed its so-called FICO-9 score to reflect a portion of the upcoming credit reporting changes. But half a dozen others will be affected by civil judgments, public rights and the seizure of certain medical debt consumer files. FICO-scoring models, as well as so-called Vantage scores that some lenders use to rate insurance and mortgage risks.
Why are liens, judgments and medical debts targeted? Mainly because these loans were not always accurately reflected on credit reports. Medical loans, in particular, were a problem for a variety of practical reasons. First, unlike credit card charges, medical debt is often the result of an unplanned event, such as an emergency surgery or illness that may take some time to pay off. Doctors and hospitals also didn’t have a standard formula for when to send unpaid debts to collections, which meant some customers were reported to be woefully late on payments when they were just one or Two were overdue for more than a month, while others went unreported for years. Additionally, cheap payments by insurers can send medical bills into collections – a damaging credit blemish – through no fault of the consumer. Worse, even after the insurer pays the medical bill, the damage to the consumer’s credit usually lasts for years.
Additionally, judgments and liens were rarely updated, so consumers could see their credit suffer long after judgments were paid and liens issued.
What about mixed files? Credit reporting models don’t need to match every bit of data before adding the information to a customer’s file. In fact, some companies that report your payment history to the credit bureaus did not include your name, address, age and Social Security number when they reported a problem. So if you are named after a parent, your data can be matched with the parent because your name and previous address match, even though your Social Security number and age were different.
Starting Sept. 15, any company that provides credit data to the bureau must include your full name, address, Social Security number and date of birth, reducing the chance of your file being mixed up with someone else’s. should do.
What does it matter? Banks, credit unions, insurance companies, credit card issuers and mortgage firms typically decide what prices to charge you for their products based on your credit score. The lower your score, the greater the risk you’ll default on the loan and the higher the rate you’ll pay. In many cases, in fact, lenders will advertise that you can get a preferential interest rate if you have “tier one” credit. However, if your credit score causes you to fall into a lower “tier,” your rate may be higher – often several percentage points higher. And that can cost a fortune in additional financial expenses.
For example, if you want to get a 30-year, fixed-rate mortgage, you might be able to get a 4 percent interest rate in today’s market, if you’re the highest credit risk. However, if you had a low credit score, you could pay 5 percent. At 4 percent, for example, your monthly payment would be $1,193.54. At 5 percent, that would jump to $1,342.05 – or $148.51 more per month. Over the life of the loan, the difference is more than $53,000.
Will these changes allow consumers to jump into higher credit ratings? In some cases, yes. But it’s hard to know for sure because different lenders set their credit scores at different levels. For example, if you have a credit score above 720, you are generally considered in the top credit tier for a car loan. However, you may need to get a score of 740 or higher to get the best rate on a home loan.
What should I do about the changes? The most important thing you should do now is to monitor your credit score. Many websites and several credit card issuers, such as Citibank, Discover, American Express and Capital One, already provide their customers with free access to credit scores. If you don’t get free scores yet, consider signing up to one of the free score websites, e.g. Credit karma Or Credit Sesame. Write down your current score, then check back in the fall to see if your score is significantly higher.
It’s worth noting that your credit score will change gradually each month, depending on your payment history, how much debt you have outstanding, when you last applied for credit, and other factors. This is usually only important when your score goes up by 20 points or more. This is the type of change that can push you into a higher (or lower) credit rating.
What if I see my credit score increase by this amount? Start by talking to your creditors, suggests Ed Mirzonsky, US program director for the US Public Interest Research Group. He noted that credit card companies may agree to lower your rate with little more than a phone call, assuming your credit situation has improved.
Auto loans and mortgages can also be refinanced if your credit has improved significantly. However, whether or not you should refinance these loans will depend on a number of factors, including how long you expect to keep the car or home, current interest rates and whether you have any upfront fees. Must pay.
Meanwhile, you may also pay higher rates on your insurance policies because of your credit score. So if your credit score is rising, it might make sense to start shopping for new homeowners, auto and life insurance.