Personal Finance

Your credit score may jump starting this month

Key Points
  • New criteria will strip some negative information from credit reports.
  • For some, scores could rise by up to 20 points.
  • The changes took effect Saturday.
Changing credit scores
Changing credit scores

Some consumers may suddenly have a higher credit score.

That's because improved standards for utilizing new and existing public records were implemented on Saturday for the three major credit reporting companies. As part of this change, a majority of civil debts and tax liens are excluded, which means some credit scores will edge higher.

The new criteria come on the heels of a report by the Consumer Financial Protection Bureau that found problems with credit reporting companies and recommended changes to help consumers.

Altogether, about 7 percent of the population will have a judgment or lien removed from their credit file, according to a report by Fair Isaac. The company calculates and sells FICO scores, one of the most commonly used scores by lenders.

Once that information is stripped out, their numbers could rise by up to 20 points, Fair Isaac said.

On the other hand, "analyses conducted by the credit reporting agencies and credit score developers FICO and VantageScore show only modest credit scoring impacts," the Consumer Data Industry Association said in a statement. The association represents Equifax, Experian and TransUnion.

Credit reporting and scores play a key role in most Americans' daily life. The process can determine the interest rate a consumer is going to pay for credit cards, car loans and mortgages — or whether they will get a loan at all.

In the near term, "it will lower the cost of borrowing," said Andrei Andreev, an adjunct professor of finance at San Diego State University.

For consumers who are not directly affected, there could be consequences as well. With more borrowers now qualifying for better terms, banks may eventually have to "increase interest rates to compensate for that additional risk," said Thomas Brown, a senior vice president for LexisNexis Risk Solutions. LexisNexis also provides lenders with data to make credit risk decisions on consumer loans.

"What it really means is that there is vital information that is being ignored, and the net result will disadvantage the other 93 percent of consumers," Brown said.

"It will take us a little while to know exactly what the overall impact is," said Ofer Mendelevitch, vice president of data science at online lender LendUp.

For now, by eliminating those large sources of potential for errors, "we think it will represent credit worthiness better," he said. (Incorrect information on a credit report is the top issue reported by consumers, according to the CFPB.)

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