Good & bad news on credit reports, credit scores

More consumer protections, but disturbing developments, too

Published: May 12, 2015 12:30 PM

It's been a busy spring for consumers in the credit-report arena. Several new developments ensure a better shake for job-seekers; folks in credit counseling; and those disputing mistakes on their credit reports. But other developments point out how far we still need to go to ensure all consumers get a fair shake regarding credit access.

NYC: Employers can't use credit histories

Early this month, New York City banned employers from checking prospective employees' credit records. The result can only be positive for job-seekers. Now, people whose credit is less than stellar—due to their own actions or to an uncorrected mistake on a credit report—won't have to worry about that part of their background affecting their job prospects. The new law, with some exceptions, prohibits employers, labor unions and employment agencies from using or requesting applicants' credit histories. Those entities also cannot discriminate against an applicant based on his or her credit history. 

Researchers have shown there's not much to back up employers' contention that a job applicant's good credit score correlates with responsible behavior, dependability, ability to meet deadlines, and other positive personality traits.

Credit agencies must act more responsibly

New York City's law comes on the heels of another major step taken in the Empire State on behalf of consumers beset by credit report errors and glitches. In March, New York State Attorney General Eric Schneiderman announced a settlement with the three major credit-reporting agencies, Equifax, Experian and TransUnion, to improve their resolution of consumer complaints. The companies now must employ specially trained workers to handle all disputes involving fraud, identity theft, and mixed files—where one consumer's credit information inadvertently lands in another consumer's credit file. 

The agreement also requires that, for all types of credit disputes, the credit reporting agencies can't just assume that the creditor is right and the consumer is wrong. When a creditor validates a disputed item on a consumer's report, personnel with the authority to resolve the dispute must look over the supporting documentation. The agencies cannot automatically reject the consumer's dispute.

Medical debt also will not be entered into credit reports for a 180-day period, giving consumers a reasonable period of time in which to pay their bills without appearing to be in trouble on their credit reports. Medical debt is a major issue in credit disputes.

All consumers already are entitled to one free credit report annually from each of the three agencies, by going to annualcreditreport.com. But the new settlement requires the agencies to give a second free report to consumers who want to see whether changes have been made following a resolved dispute.

As we've written, credit reports are used as the basis of all kinds of decisions. And mistakes on your report can have serious repercussions. You may not get a lease, or you may get a mortgage with less-than-favorable rates. You may pay more for auto insurance. And—except now in New York City—you may miss out on a job. 

Consumer Reports Banking and Credit Guide provides unbiased advice and tips for getting the best bank services and loans.

Debtors now can see their credit scores

Debtors attempting to make a fresh start got a helping hand recently from FICO, the company that provides the bulk of credit scores in the United States. The company said it and the three credit-reporting agencies would allow counselors at not-for-profit credit counseling services to let the consumers they counsel see their own FICO credit reports and credit scores. 

It seems like a no-brainer that a consumer would need to see his or her credit history to figure out how to improve. But apparently, a "no-sharing" provision is common in contracts involving business users of credit reports and scores, including credit counselors.

The Consumer Financial Protection Bureau praised the agreement, calling it "a step in the right direction." We agree.

CFPB uncovers "invisible" consumers

One disturbing development, however, was outlined last week by the CFPB. An estimated one in ten adults has no credit history—at least none in the traditional sense used by mainstream lenders. Either these consumers don't have enough of a credit history to generate a credit score, or the information on their reports is so old or "stale" that it can't be utilized in a score. 

Most of those "invisible" consumers live in low-income neighborhoods, the CFPB reports. Black and Hispanic consumers are more likely than other groups to have no credit history. Having no credit record can make it near-impossible for those consumers to get loans at reasonable rates, or to get loans at all. 

“A limited credit history can create real barriers for consumers looking to access the credit that is often so essential to meaningful opportunity—to get an education, start a business, or buy a house," CFPB Director Richard Cordray said. 

FICO action may hurt consumers

Unfortunately, one possible solution to that problem, announced recently by FICO, doesn't sit well with consumer advocates, including Consumers Union, the advocacy arm of Consumer Reports.

FICO recently announced a pilot program with Equifax and Big Data broker LexisNexis to create a credit score from "alternative" data including property records, and phone and utility bills. The idea is to create a score for creditworthy consumers who otherwise would have difficulty obtaining traditional credit. "Working with Equifax and LexisNexis, we set out to help unbanked, under-banked and disadvantaged people gain equal access to the standard credit products enjoyed by millions of Americans," a FICO executive noted in a press release.

But the Defend Your Dollars blog, run by Consumers Union, notes that utility bills shouldn't be used as the basis of credit scores, and that such sources of data actually may hurt those disadvantaged people. 

"Utilities payments can skyrocket unexpectedly in a cold winter or sweltering summer, and consumers don’t always have the money to pay these bills on time," the blog notes. "And even turning in one bill one month late could dock you 100 points on your FICO score.

"We agree that more consumers should have access to credit – but mandatory reporting of utilities data isn’t the way to do it," the blog concludes.

—Tobie Stanger (@TobieStanger on Twitter)


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