Overhaul Boosts Credit Scores of Millions of U.S. Consumers
Those with at least one collections account removed from their credit reports experienced an 11-point increase, on average
The three largest credit-reporting firms have changed how they deal with collections, boosting consumer’s credit scores. Photo: tami chappell/Reuters 14 CommentsByAnnaMaria Andriotis and
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. EFX -0.74% 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 EXPGY -1.38% 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.
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.
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