What The Fair Credit Report Improvement Act Means For Credit Card Applicants
Rep. Maxine Waters, a Democrat out of California has introduced a new bill to congress, The Fair Credit Reporting Improvement Act of 2014, which seeks to massively overhaul consumer credit reports and credit scoring. The bill aims to reduce the period of of time in which loan defaults, bankruptcies are included in ones credit report and there by affecting ones credit score or FICO score. The Fair Credit Reporting Improvement Act of 2014 will also affect the ability of people to buy a home and obtain a mortgage as the bill aims to remove some types of foreclosures and short sales from peoples credit reports. The removal of foreclosures and short sales will come into effect only if the Consumer Financial Protection Bureau deems the loans that are in default to be the result of deceptive lending practices.
The bill will also effect private student loans. In today’s era many students struggle repaying the loans due to periods of no work and life expenses. If a student has late payments, but then makes payments on time for 9 months, all mention of the late payments will be removed. Currently late payments for any type of credit will remain on your consumer credit report for a period of seven years. The bill also aims to reduce the time that bad debts remain on a credit report from seven to four years. All debts that ended in collections but were later settled out would also be removed wholly. The bill aims to introduce 20 new provisions or fixes to the 44 year old consumer protection law.
The Consumer Financial Protection Bureau, a federal agency has questioned the issue of medical debt being as big of a factor as it is today in scoring someones credit. As medical debt often arises from unforeseen circumstances and is not a loan or credit issued to someone who is sick or injured, medical debt is not seen by the Consumer Financial Protection Bureau as a good indicator of a consumers credit worthiness. Even for those with insurance, gaps in the time that insurance agencies pay the medical provider have had otherwise good consumers with excellent credit end up in collections and being hounded by collection agencies.
Fair Isaac Corp, which is in charge of the industry wide FICO scoring system meanwhile has stated they will no longer lower a consumers FICO score for failure to pay an overdue bill if that bill is at some point repaid, either in full or settled out for less than originally owed. In the past taking a SIF or settlement in full would damage your credit score for a few years, but no longer in the case of the FICO scoring system. It should be noted however that most credit card and loan companies take the FICO score system and apply their own in house modifiers to that score, so the score you see may differ from the score that your creditor sees. They are also reducing the penalty to your FICO score for unpaid medical bills that are with a collection agency. All of the FICO changes are being put into place to make it easier for consumers to get a loan.
The bill by Rep. Maxine Waters and the action being taken by Fair Isaac Corp are both being taken to give Americans increased access to credit in a time when many people need it the most. The move by Fair Isaac Corp is rewarding people for repaying their debts, as in the old system even had you repaid the debt your score would suffer for years, effecting a consumers ability to obtain any new credit. Both moves will help Americans who prior had credit issues get better interest rates on credit cards, mortgages, auto loan, and student loans.
The information on consumer credit reports has always been regulated by Federal law, including which types of payments can be included on credit reports, how long they can appear on your credit report, such as how long it takes for a delinquency to fall off of a consumers credit report. Lenders such as mortgage companies and credit card companies are taken aback by news of the bill. The lenders claim they need the information that is to be removed from credit reports to determine a borrowers true credit worthiness and to help determine a borrowers ability to repay a loan. The changes can make someone who has poor credit have excellent credit once the changes take effect. For example a consumer with a stable job history, good income but also with 5 charge offs who settled them out for less than what is owed, has 2 open credit cards in good standing and a short sale on their record would if this bill becomes law have excellent credit. While lenders are balking at the bill, The Consumer Financial Protection Bureau sees many problems with the current system as it stands, including the ability of borrowers to have disputed information removed and the accuracy of the reports themselves. I predict 2016 will be an interesting year for credit news.
This article was written by Steven Moore, who has been covering consumer finance and the credit card markets since 2006. You can learn more and connect at his Google+ page.