One change that the COVID-19 pandemic brought to credit reporting is the ability for consumers to access their reports free of charge, a benefit that’s been extended through 2022. However, Congress is currently debating whether or not to make more significant changes to the entire credit reporting process, including what information appears on reports and for how long. Read on to learn about how credit reporting currently operates and what proposed changes are on the table.
Who Is Currently in Charge of Credit Reporting?
Experian, Equifax and TransUnion are the three private companies that currently provide credit reports. Scores may vary from company to company but are based on the industry-standard FICO score, which has five components: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).
What Are the Proposed Credit-Scoring Changes?
President Joe Biden has been among the many voices in Washington calling for a complete revamp of the current credit scoring system. Proposed changes include the development of a government agency to provide credit reports, rather than Equifax, TransUnion and Experian. One of the main changes would be the incorporation of rent and utility payments into a credit score in an attempt to level the credit-scoring field. The following changes are also being suggested:
Prohibiting Scores From Being Used for Other Purposes
Although credit scores are primarily used to determine qualification for loans, they can also be used for employment purposes and other matters. Under the new proposals, this and other uses would be prohibited.
Reducing the Time That Negative Information Is Reported
Currently, negative information, such as missed payments, remains on a credit report for up to seven years. Under the new proposals, that time period would be reduced to just four years, although bankruptcies would stay on for seven years.
Full vs. Partial Payments: Which Is Best for Your Credit Score?
Eliminating COVID-19-Related Derogatory Information
One of the most timely credit reporting changes is the suggestion to remove any derogatory information that’s related to the COVID-19 pandemic. For example, if someone lost their job due to the pandemic but otherwise had a spotless credit history, the new system would not penalize them for any additional debt incurred or payments missed.
Keep Reading: 8 Ways To Get an 800 Credit Score
Limiting the Reporting of Medical Debt
Debt for medically necessary procedures may no longer appear on credit reports if proposed changes are enacted. An additional proposal would delay the appearance of medical debt on your credit report for a full year after being incurred in order to allow consumers additional time to settle those outstanding bills.
What Are the Pros and Cons of These Proposed Changes?
Overall, the proposed changes to the credit reporting system are designed to help protect consumers from poor credit information. Reducing the amount of time that negative information is reported and eliminating certain medical and COVID-19-related debt is also intended to avoid penalizing consumers for bad credit that wasn’t necessarily their fault. The assumption of credit reporting duties by the government is also intended to help reduce credit reporting errors.
Some of those opposed to changes are skeptical that having the government run a program that’s currently in the hands of private enterprise would be any more efficient or accurate. Others feel that reducing the time that negative information is reported lets people off the hook too easily.
When Might the Credit-Scoring Models Change?
Two bills, the Comprehensive CREDIT Act and the Protecting Your Credit Score Act of 2021, each passed the House of Representatives before the pandemic. Now, both of these bills are back under active consideration. The wheels of legislative action tend to turn slowly, but if these bills become law they could bring a significant change to how credit scores are calculated and reported.
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