Credit Reporting Reform: What You Need to Know


It’s been nearly 60 years since the Fair Isaac Corporation (FICO) started on the premise that data could be mined and used to inform business decisions. FICO honed the score and currently sells it to banks, insurers, retailers and credit card companies. Today, FICO score ranges from 300 to 850 and are based on data provided by the nation’s three credit reporting agencies (TransUnion, Experian and Equifax). Borrowers with scores above 750 are generally considered excellent, while scores below 650 are considered poor.

The most important factors that determine your score are:

(1) Payment History (including especially paying bills on time) accounts for about 35 percent.

(2) Total debt outstanding takes into account how many accounts you have and how close you are to your total credit limit. It makes up 30 percent of the score.

(3) Number of inquiries, which are broken into "soft", for preapproved offers; for insurance or employment purposes; and for when you check your own credit report or score. Soft inquiries, which do not hurt your score. Hard inquiries, like when you are shopping for a mortgage, auto or student loan can count against you and are responsible for about 10 percent of your score.

(4) The mix of credit (credit cards; installment loans like mortgages or car loan, and/or a student loan), contributes about 10 percent.

(5) Credit history – the more established your credit history, the better. This accounts for about 15 percent.

The ubiquitous use of credit scores makes their accuracy all the more important. If scores are lower, due to bad data or error-ridden reports, a consumer’s cost of borrowing could be higher than it should be or their living arrangements or job prospects could be negatively impacted.

After the Consumer Financial Protection Bureau conducted a 14-month probe, which found that it is notoriously difficult for consumers to correct credit report errors, the State of New York led the charge on reforming the credit reporting agencies. In a sweeping settlement, credit bureaus will make sweeping changes to everything from the credit reporting format they will accept from lenders to how they conduct investigations of disputed items to how and when they'll accept medical collections. The settlement will be implemented in three phases, starting this month and concluding by June 2018.

The highlights of phase one include a big change for consumers: bureaus cannot refuse to accept a consumer's dispute simply because she does not have a current copy of her credit report. Additionally, if the bureaus receive a dispute from a consumer that contains documentation, which supports the consumer's dispute, they must modify the information accordingly or fast track the dispute to an employee who is empowered to make the change as requested by the consumer on the sole basis of the documents they provided.

This so-called “empowered agent” provision of the settlement underscores the importance consumers providing supporting documents with their disputes. Otherwise the credit bureaus will simply contact a collection agency and take their side with respect to the disputed information.

In addition to removing errors from your credit record, there are a number of steps to take to improve your score. The most important is to pay your bills on time. According to FICO, 96 percent of people with excellent credit (above 800) pay their bills on time. (Most lenders will not report a late payment until you are 30 days late.)

You should also keep your total balances in check. Consumers with the best scores use just 7 percent of their revolving credit lines, but anything below 30 percent is considered acceptable. Apply for new credit judiciously and don’t close accounts—just don’t use them. Remember that co-signing a loan counts in this calculation. Maxing out a credit card could cost you as many as 45 points), according to FICO, even if the amount you owe is small.

Finally, stay away from credit repair pitches. There's nothing a so-called “credit repair clinic” can do that you can't do on your own.