Overhaul Boosts Credit Scores of Millions of U.S. Consumers
August 15 2018 - 6:44AM
Dow Jones News
By AnnaMaria Andriotis and Josh Zumbrun
The credit scores of millions of U.S. consumers have risen
following a broad overhaul of how credit-reporting firms handle
negative credit information.
Consumers who had at least one collections account removed from
their files experienced an 11-point increase, on average, in their
credit scores, according to a report released Tuesday by the New
York Federal Reserve. The report was based on a sample of millions
of anonymous credit reports from credit-reporting firm Equifax Inc.
Collections were completely removed from 8 million consumers'
credit reports in the 12 months through June, resulting in an
average 14-point increase.
The improvements come after the three largest U.S.
credit-reporting firms changed how they deal with certain kinds of
negative credit events that some have said are prone to error and
unfairly drag down credit scores. The firms--Equifax, Experian PLC
and TransUnion-- agreed to revamp the reports following settlements
with state attorneys general dating back to 2015.
The settlements prompted the credit-reporting firms to remove
some non-loan related items that were sent to collections firms,
such as gym memberships, library fines and traffic tickets. The
firms also agreed to remove medical-debt collections that have been
paid by a patient's insurance company.
Collections weigh heavily on consumers' credit scores, and they
became more common in the aftermath of the financial crisis. By
2013, the share of credit reports with at least one account in
collections had climbed to 14.6%.
That number fell to 12.5% in the second quarter of 2017, before
experiencing a sharp drop down to 9.4% in the second quarter of
this year--a decline from about 33 million consumers to 25 million
consumers. That overlapped with the time period when the
credit-reporting firms were implementing changes from the
settlements.
Credit-reporting executives say that the changes are part of a
broader challenge facing credit reports and the overall consumer
lending system.
A series of changes have been announced in recent years aimed at
removing negative information from credit reports, because that
information is more likely to be incorrect or might not be
reflective of consumers' efforts to repay their debts. Beyond
collections, the three credit-reporting firms decided in 2017 to
begin removing much tax-lien and civil-judgment data from
consumers' credit reports. Earlier this year they decided to stop
adding new tax-lien information.
The result is that a growing amount of adverse credit
information is falling off of consumers' credit reports, resulting
in higher consumer credit scores.
The majority of the consumers who benefited from the removal of
collections from their credit reports had low credit scores,
according to the New York Fed. Nearly 80% of the affected people
had credit scores below 660 before the collections were removed.
They also had higher delinquency rates on other debts besides their
collections accounts compared to everyone else.
For 20% of consumers who previously had a score below 620, the
changes pushed their credit scores above that level--an increase
that can mean the difference between getting approved or denied for
a loan.
Write to Annamaria Andriotis at Annamaria.Andriotis@wsj.com and
Joshua Zumbrun at Josh.Zumbrun@wsj.com
(END) Dow Jones Newswires
August 15, 2018 06:29 ET (10:29 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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