There’s a reason why most people’s understanding of where their credit scores come from is spotty at best. The scores emerge from a large and complex network of organizations that includes the three major credit-reporting bureaus collecting and selling huge volumes of data, lenders of all kinds sending more files to them all the time, and government agencies trying to make sure that the companies’ actions don’t disadvantage the poor or truncate people’s rights.
We’re talking about a system with a great deal of power over how money moves around in our society.
At the end of all that, the system spits out products like the FICO credit score, a three-digit number that helps lenders estimate the likelihood that a person will default on their loans. The numbers range from 300 at the lowest, which means most likely to default, to 850 at the highest, which means rock-solid credit. The scores become important any time you need to borrow money, which comes up when you want to buy a house or car, get health care on credit, and so on. If you qualify for credit, the scores help determine what your interest rate will be—often making a difference of thousands of dollars over the term of the loan. These scores can even determine whether you get hired for a job, since many employers look at credit scores.
So we’re talking about a system with a great deal of power over how money moves around in our society. At its center are the three largest credit bureaus—Experian, Equifax, and TransUnion—which are all publicly traded corporations. They keep records on on the financial histories of about 220 million Americans, and they make most of their money from selling that information to banks and other groups that want to understand how likely borrowers are to pay their debts. The three companies together made $8.5 billion in revenue in 2014.
Lenders depend on these companies pretty heavily for the information they use to make decisions. That’s why these lenders—including everyone from JP Morgan Chase to your local hospital—support the credit bureaus by sending them files every month about who paid what, and who didn’t. That’s how the bureaus always seem to know when you’ve made a late payment or opened a new line of credit.
A bad credit score can mean the difference between renting and buying a home…
The system is profitable but imperfect, and for decades critics have attacked it for all sorts of offenses. In 1969, Columbia University legal scholar Alan Westin testified to Congress that the companies violated Americans’ right to privacy and that their inaccuracies damaged lives. His testimony helped pave the way for the Fair Credit Reporting Act (FCRA) of 1970, which requires the credit bureaus to delete old information, let consumers see copies of their files, and correct mistakes, among other things.
More recently, the think tank Demos published a report that found that credit checks by employers “illegitimately obstruct access to jobs,” especially for the poor and for people of color.
And then there’s the most common complaint: that it’s hard to get the credit bureaus to remove mistakes from files. This may seem like just an annoyance, but the stakes are high. A bad credit score can mean the difference between renting and buying a home, and some people have spent years writing letters and making phone calls to these companies in a frustrating effort to correct their information.
Luckily for most people, regulators have been making gains. Here’s a list of six recent developments that made the credit-reporting system more accountable.
1. A new sheriff’s in town
In the wake of the recent financial crash, the Dodd-Frank Wall Street Reform and Consumer Protection Act squeaked through the Senate and became law in 2010. The legislation created the Consumer Financial Protection Bureau, the first federal agency tasked exclusively with protecting people from unfair tactics in the financial sector. This agency now shares enforcement responsibility for the FCRA with the Federal Trade Commission (FTC), which had been in charge until 2010.
The CFPB is not Wall Street’s favorite thing ever.
All this was good news for consumers but made financial types nervous. As the Wall Street Journal reported at the time, JPMorgan Chase “assigned more than 100 teams to examine the legislation.”
It turns out they had good reason. In 2012, the CFPB went beyond enforcement and started supervising the credit bureaus for the first time. The difference is subtle but important. Enforcement means going after companies once they break the law, while supervision is more preventative; the CFPB watches the companies, warns them when enforcement is coming, and issues reports on the industry. (We’ll get to some examples of enforcement in the next section too.)
As you might imagine, the CFPB is not Wall Street’s favorite thing ever. If you’re looking for a positive outcome of the shenanigans that crashed the economy in 2008, look no further than today’s beefed-up regulatory environment for lending and credit.
2. The new rules have teeth
The CFPB’s take on enforcement has been aggressive so far, and it extends beyond just the three credit bureaus to include the much larger companies that send them information. For example, in July 2015 the agency slammed JPMorgan Chase with $130 million in penalties for selling off debts that had already been settled or simply never existed to collection agencies, among other violations. These debt sales affected more than 528,000 people, according to the CFPB, which also called for Chase to contact the credit bureaus and have the bad debts removed from people’s files.
That’s not to say the Federal Trade Commission was slacking before Dodd-Frank. The FTC went after Experian, TransUnion, and Equifax in 2000 for failing to keep a hotline open where consumers could complain about credit-score inaccuracies. That was a violation of the FCRA, the Commission said, and fined them a total of $2.5 million.
Of course, that’s just pocket money for companies of this size. But with both agencies working together to regulate the sector, consumers have more leverage now than they’ve had in decades.
3. Attorneys general to the rescue
Federal regulators are not alone in their efforts to get all the players in the credit-score game to treat citizens fairly. State-level attorneys general are another important source of enforcement, and in March of this year, Eric Schneiderman of New York state scored a big win. His office got all three major credit bureaus to agree to changes likely to affect the lives of most Americans .
The first highlight involves medical debt, which makes up fully half of the accounts in collection messing up Americans’ credit scores. In part because medical bills tend to be prone to errors, the credit bureaus agreed to wait six months before adding them to credit files. That will give people time to address problems before their credit scores plummet because of illnesses and accidents they had no control over.
The agreement also requires the credit bureaus to make sure that trained humans are available to talk with people who want inaccuracies on their files corrected—not just robots and automated systems.
“They are going to have to hire a lot of people,” Schneiderman said.
4. New forms of scoring for low-income people
This one is a bit controversial. This spring, the Fair Isaac Corporation—the California-based company that created the FICO score—unveiled a new form of credit rating specifically intended to include some of the 53 million Americans who are “credit invisible.” These tend to be low-income people who haven’t interacted with the system enough to generate a score. That makes it hard for them to get the loans they would need to start a business or purchase a home.
The company’s solution is an alternative score that counts things like monthly phone payments and utility bills . Almost everybody makes some payments of that kind, so Fair Isaac hopes the program will create a stepping stone for economically marginalized people to eventually qualify for a credit card and end up with a FICO score.
Consumer rights advocates say that’s just the problem: Their scores are likely to be bad ones and could do more harm than good. And poor people’s failure to pay often comes from factors beyond their control. Utility bills can spike during bad weather, for example, and those bills can take a while to pay down.
5. Other ways to measure credit
So far, we’ve seen some efforts to reform the behavior of Experian and friends. But what about simply looking at other ways to measure people’s ability to pay?
In August 2015, a major player decided to do just that. The Federal Housing Administration is a government agency that works to expand the number of people who are able to own homes in the United States. To do that, it backs lenders when they make mortgage loans to people who might not otherwise qualify for them. This summer, the Administration announced that it would back loans made to people with very low credit scores, as long as the potential buyer was otherwise qualified. For example, a person who had good income but whose credit score was low might qualify for the program.
Not all banks are into the policy change, which is still being finalized. Wells Fargo, for example, announced that it was backing out because it sees the loans as too risky. But home buyers with bad credit scores have a window of opportunity if they’re willing to shop around.
According to a real estate news website, the change could “create a pathway for as many as 75,000 to 100,000 new loans a year to borrowers who are currently frozen out of consideration.”
6. Complaints—now with document images!
The three credit bureaus use a specialized system called e-Oscar for receiving consumer complaints about inaccuracies. It’s not exactly the most high-tech system, and until recently did not allow attachments. That was an obstacle for consumers who had paperwork that proved that they’d paid a bill, for example.
The Consumer Financial Protection Bureau identified this limitation as a problem in a study published in 2012, and just a year later, on August 10, 2013, the system was finally updated to allow attachments.
So go forth, and complain about inaccuracies on your file in style.