How Your Credit Score Could Rise Soon Without You Lifting a Finger

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.