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Big changes are coming to both credit scores and credit reports – some as soon as September. Thanks to a combination of state lawsuits, federal regulation and old-fashioned competitive pressures, the way Americans are graded on their ability to pay back loans is about to enter a bit of a Renaissance. The changes probably won’t come as fast as you’d like, but they are coming, so here’s a guide.

Credit Report Changes

Most of the changes to credit reports are the result of a settlement reached earlier this year between the credit reporting agencies and a group of state attorneys general. The biggest change: some events that would have been a blemish in the past will no longer appear on consumers’ reports, a welcome change for borrowers.

Unpaid medical debts – medical collections represent roughly half of all collection accounts on credit reports, according to the CFPB – will be treated very differently. The bureaus will institute a 180-day waiting period before they enter medical debt onto a consumer’s report. Many health-related debts are the result of insurance confusion and other innocent mistakes, so consumers will now be protected by this grace period.

In addition, medical debts that had been considered delinquent but have since been paid by insurance will be removed from credit reports. Ordinarily, “paid late” notations remain as blemishes even after consumers pay off a debt.

The AG settlement includes several other consumer-friendly changes too, such as a requirement that the bureaus do a more thorough job of investigating consumer disputes. Specifically, they must employ specially trained experts to handle disputes involving identity theft, mixed files or fraud; and they must allow for human intervention when a lender and a consumer disagree about a debt. The bureaus must also get better about sharing information with each other when consumer credit reports errors are discovered.

Some smaller, technical changes required by the settlement will take effect this September. Suppression of medical debt entries that were ultimately paid by an insurance company will be required by September 2016. Unfortunately, the most important changes — the 180-day delay in medical debt reporting and more thorough review of consumer disputes — aren’t required until June of 2018.

Credit Score Changes

Fortunately, changes to the way credit scores are calculated — many that directly reflect the issues raised in the attorneys general settlement — have already taken effect in the latest scoring formula published by FICO, known as FICO 9.

Unfortunately, FICO formulas are a bit like software upgrades, and it will take time — perhaps years — before banks adopt or integrate FICO 9 into their own scoring formulas.

Still, the adjustments in FICO 9 are good for consumers. FICO has changed the impact that unpaid medical debt has on scores, reflecting the firms’ research that unpaid health bills don’t typically equate to bad payment habits. Essentially, unpaid medical debt won’t have the same drag on scores as other unpaid debt.

“The median FICO Score for consumers whose only major negative references are medical collections will increase by 25 points,” FICO says.

The new formula will also help consumers who are digging their way out of debt. Bills sent to third-party debt collectors that are paid in full will no longer count as negative entries in the FICO 9 formula.

Meanwhile, there’s a continued drumbeat for credit scores to include other non-traditional factors. Credit bureaus TransUnion and Experian have both released studies in the past year suggesting that inclusion of payment histories from non-banking entities such as landlords or utilities would boost millions of consumers’ scores. Borrowers with “thin” credit histories, such as young adults or immigrants, could be heavily impacted by such a change.

Consumers can get their credit reports for free once a year from each of the three major credit reporting agencies through AnnualCreditReport.com — this can help you check your report for errors or other issues. There are also many ways for consumers to track their credit scores for free — including two monthly credit scores through Credit.com — to watch for any major changes that could signal a problem.

More on Credit Reports & Credit Scores:

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  • http://www.credit.com/ Credit.com Credit Experts

    You can attach a note to your credit report, but that won’t undo the damage to your score, unfortunately. (Unless you happen to live in Texas . . . then you may have some options.) The best news we have for you is that time (and positive information on your credit reports) will reduce the impact of the negative. It will not hurt to send your documentation to the original creditor and to ask them to pull it back from the collectors. If this is not possible, you can try it with the debt collector, and ask that it not be reported. Trying with the credit reporting agency is also a possibility, though they will go to the collector . . . and if the collector verifies the information, it will stay on your report. However, if the collector does not reply or does not verify, the information has to come off your report. Bottom line: You have nothing to lose by trying, but you might want to try with the data furnisher first.

  • tj

    I would prefer to lien to people who have a low credit report because (if not due to bad debt) for example, I didn,t owe anyone ( after a long history of car payments, mortages owing over $400,000 and a credit rating of 840) except one credit card that never carried a balance, was paid in full each month and my credit score went down in the 600. Does that make any since. Over a 20-30 yr history of paying on time to one credit card payment in full each month, who hold a risk of bad credit, not the one with 0 balances, new laws should address this situation. Couldn’t get an auto of .09 because score in the 600 with evidence that all the years credit was paid on time until 0 balance..

    • http://www.credit.com/ Credit.com Credit Experts

      Are you sure? It’s actually possible to have a good score without debt. You can read more about that here:
      How to Improve Your Credit Score Without Debt. You can also take a look at your free credit score from Credit.com. It includes an analysis of the factors that determine your score and personalized advice for improving it.

  • http://billcollectorshateme.com/ Bill Collectors Hate Me

    This is very good news for all of us and a long time coming!

  • Netty D

    One should never live beyond there means! Because you never know when the bottom is going to fall out of the financial world! or becoming unemployed! Enron! Freddie Mac! But there was no mention of Student loans.

  • WM

    Its about time. Theres alot of people that have bad credit scores. Not because they dont pay their bills, but because of medical bills.
    The credit bureuos are not on the side of consumers. But on the side of the creditors or collection agencies.
    You can dispute a debt and they refuse to remove it if they say the creditor verifies it.
    In my case the debt’s was discharged in a bankrupcy. Kdmc just put the debts back on my credit report and changed the dates. Like it was after the bankrupcy.
    I have disputed them with all three bureuo’s and just recieve letters. Debt was verified and will remain.
    I hope they do have to change their actions and quit ruining peoples lives.
    The way it is now is corrupt and unfair to the consumer.
    Any creditor can put anything they want on peoples credit reports. But if you try and get them removed it is a big nightmare.

  • Whiteshaddow

    Unfortunately the real issue is being circumvented. Credit should only be extended based on the ability to repay, not by looking through a rearview mirror. % of income thresholds would prevent a lot of the BS that is happening today; bailouts, bankruptcies, tax payor funded inequity resolutions, etc. While it is nice to see changes which appear to be a ‘step’ in the right direction, it is disheartening to see so much work, resources, and time going into these types of activities versus addressing the heart of the matter at it’s core.

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