Several bills to change credit reporting are currently being considered by Congress. In particular, the National Credit Reporting Agency Act will set up a public credit bureau that acts as an alternative to private credit reporting agencies.
Moving credit reporting to a government agency is an idea that has gained ground in recent years. A think tank called Demos published a paper arguing for this in 2019, which led to the Biden presidential campaign taking up the idea.
Although this type of major overhaul is difficult to pull off, the current system does not work for everyone and needs updating.
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Problems with credit reporting
Credit reporting in the United States is a mess. The most striking problem is that a large proportion of Americans are invisible to credit. This means that they do not have credit results because there is not enough information about their credit files. Nearly 20% of Americans – a total of 45 million people – are invisible to credit, according to a 2015 report from the Consumer Financial Protection Bureau (CFPB).
Unfortunately, this problem affects some groups much more than others. Demos found that blacks, Latinos, and low-income Americans are all far more likely to be invisible to credit.
The think tank also found that creditworthiness and lending algorithms disproportionately assess black and Latin consumers as greater risks, and that colored people are more likely to have credit reporting errors. The way our credit reporting system works now contributes to economic inequality among some races.
In addition, the current credit rating system is difficult to understand. Three private credit bureaus handle consumer credit results: Equifax, Experian and TransUnion. They maintain all credit files and use the information in those files to calculate credit results.
But they do not just calculate a credit score per. Consumer. There are literally dozens of types of credit scores. Most lenders use scores from the FICO® Score system, which have several versions and variations. Let’s say you apply for a car loan. The lender could deduct any six the following scores:
- FICO® Auto Score 2 with Experian
- FICO® Auto Score 4 with TransUnion
- FICO® Auto Score 5 with Equifax
- FICO® Auto Score 8 with Experian, TransUnion or Equifax (all of which may be different)
If you want to see these scores yourself, you have to pay. Although there are free ways to get your credit score, only certain types of scores are available through these services.
Suggestions for improving the credit reporting system
Congress is considering two important bills related to credit reporting right now.
The first is the National Credit Reporting Agency Act, which would create a public credit register under the CFPB. The register would act as a public credit bureau and provide consumer reports and credit results. Its credit rating model would aim to maximize accuracy by predicting consumer risk levels while minimizing racial differences.
The second bill is the law to protect your creditworthiness. This would require private credit bureaus to set up online portals where consumers can:
- Access free credit reports and scores
- Dispute error
- Place or lift credit freezer
None of the bills have an easy road ahead. The Consumer Banking Association has already opposed the idea of a public credit bureau outlining potential problems in a letter it sent to lawmakers.
Nor would it be surprising to see Equifax, Experian and TransUnion lobby against these bills. After all, they would be better off if the bills failed. The private credit bureaus are spending large sums on lobbying – all three spent just over $ 1 million in 2020, according to research group OpenSecrets.
There may be a revision of the credit reporting system, but it is likely to take time. Demos envisage a seven-year shift from private to public credit reporting, allowing the public registry to collect sufficient data. This presupposes that the National Credit Reporting Agency Act passes, which is far from guaranteed.
How to build your credit under the current system
As flawed as the current credit reporting system is, that’s all we have right now. To ensure that your credit is a help and not an obstacle, you need to know how to build your credit.
The most important factor in your credit rating is your payment history. Make it a habit to pay all your bills on time so you do not end up with late payments on your credit file.
Unfortunately, many credit rating systems still do not count regular bills, such as rent and utilities. Credit cards and loans, on the other hand, almost always count in your credit rating.
If you do not already have a credit card, it is best to open one, use it at least once a month and then pay the bill on time and in full. This will be good for your payment history. If you have trouble qualifying for a card, try secured credit cards. These require a deposit to open, but they are often available to consumers with low credit scores or limited credit history.
There is a growing awareness of credit reporting issues, but any changes are likely to take years to come. Until then, you will be on your way to a high score under the current system by regularly using a credit card and paying it before the due date.
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