Credit score overhaul: New bill aims to put government in charge

Amid all of this week's news, one potentially game-changing piece of legislation seemed to slip under the radar: the idea of dramatically overhauling the U.S. credit reporting industry.

"Good credit is a gateway to wealth," said House Committee on Financial Services chair Maxine Waters, D-Calif., said Tuesday. "Yet, for far too long, our credit reporting system has kept people of color and low-income persons from access to capital to start a small business; access to mortgage loans to become homeowners; and access to credit to meet financial emergencies."

Waters added that the House passed two bills out of the committee before the pandemic – the Comprehensive CREDIT Act and the Protecting Your Credit Score Act of 2021– which "provide long overdue reforms to our credit reporting system."

Both bills are now back under consideration.

During Tuesday's hearing, Waters and her committee heard from consumer-protection advocates like Chi Chi Wu of the National Consumer Law Center, who proposed replacing the privately-run three-credit bureau system with a public credit registry. It would operate under the umbrella of the Consumer Financial Protection Bureau, which guards consumers against unfair or abusive practices. 

"While public agencies are not perfect, at least they would not have profit-making as their top priority," Wu told the House Committee on Financial Services during her testimony. "They would be responsive to public pressure and government oversight. They could also be charged with developing credit scoring models to reduce the yawning racial and economic inequality in this country." 

Wu added, "The fact that these are private, profit-seeking companies explains why the credit bureaus are constantly expanding their products into uses, such as employment, insurance, and tenant screening, that ultimately harm Americans and contribute to the massive inequality in our nation."

Waters noted that creating a credit reporting agency that is consumer-oriented "would be a major upgrade over today’s broken, biased credit reporting system."

In addition to the single credit bureau idea, Wu also proposed several other policies, that, if implemented, could improve the financial lives of Americans struggling to improve their credit scores and financial lives:

• Prohibiting the use of credit score information for purposes unrelated to credit decisions. This means most employers could no longer use credit reports in their candidate screening process.
• Reduce the amount of time negative information remains on your credit report. Information like missed payments and collections would fall after 4 years instead of 7. Bankruptcies would continue to stay on for 7 years.
• Limit the reporting of medical debt. They would prohibit the reporting of medical debt for medically necessary services and delay the reporting of unpaid medical bills for one year to give you time to resolve issues with hospitals and insurance carriers.
• Protect economic victims of COVID-19. The lawmakers hope to put a moratorium on the reporting of negative information incurred during the pandemic and other disasters.

To illustrate the impact of COVID on consumer credit, Waters shared a story:

Last week, I received a letter from a gentleman in Ohio. In this letter, he explained how he had lost his job because of the pandemic. Without his salary, and with no help from any of his creditors, he couldn’t afford to cover all of his bills. Though he had never before missed a credit card payment, his credit score has suffered so badly, he wrote – and I quote – 'I couldn’t get credit now if I paid someone to give me credit.'. He closed his letter by asking what this Committee was doing to protect consumers like him.

How things work now

Currently, Americans have multiple scores from each of the three major reporting bureaus.  Scoring models vary in how which factors are weighted more heavily but all credit scores are used to evaluate a person's ability to manage credit and debt. They're used to decide who gets a car or home loan, credit cards, apartment. 

These factors include:

• Payment history (Are you consistently on time or late paying your bills?)
• Credit utilization (How much of your total credit are you currently using?)
• Length of credit history (How long have your credit cards and loans been open and are they in good standing?)
• New credit (Have you been frequently applying for credit lately?)
• Credit mix (Do you have a variety of credit, such as loans and credit cards?)

The goal: Eliminate errors, ensure fair practices, end confusion

Fixing mistakes on a credit report (let alone, all 3 versions) can be a byzantine system of filling out forms and phone calls.

"The fact that their customers are creditors and other users of information explains the unacceptable error rates and bias against consumers who complain about errors," Wu argued, adding that, "if consumers are not able to obtain legal redress for FCRA (Fair Credit Reporting Act) violations, a key means of enforcement disappears, making the broken credit reporting system much, much harder to fix. A public credit registry would replace or provide an alternative to this broken system."

Both Wu and Waters referenced a recent Supreme Court decision, which narrowed the case brought by an Arizona man who had successfully sued Transunion for relief after a car dealership's credit check incorrectly flagged him as being on a terrorist watchlist.

But even smaller errors can cost you over the long haul in the form of higher interest rates on mortgages and car loans – or possibly getting a mortgage or rent application denied, even if you satisfy the income requirements.

Crucial FICO scores in need of updates

In order to help consumes protect their credit during the pandemic, the bureaus have extended the availability of free credit reports until 2022. However, these reports usually do not include your FICO scores. Those you usually have to pay the credit bureaus for – especially if you want to see the ones that will be used when you go to buy that house or car and get an idea of which rate your qualify for.

Another problem related to mortgages: Although both FICO and Vantage scores have been recalibrated to reduce the impact of medical debt, those aren't the ones used by Fannie Mae and Freddie Mac during the mortgage-underwriting process. So to streamline the process, many lenders use the same less-forgiving FICO 5 (Equifax), 4 (Transunion) and 2 (Experian) scores and often take your middle score. And again, these are scores that consumers usually have to pay to see. They're also used to evaluate rental applications.

Your credit score also impacts your auto insurance payment, determining whether you can afford to drive that car to work. It might even factor into whether you get that job.

"It’s essentially the report card for a consumer’s financial life," Wu said. "Yet for such an important record, credit reports and scores suffer from profound problems and abuses."