Millions of consumers may have seen their credit scores increase over the last year, according to a new government report.
A Federal Reserve Bank of New York report released in August measured the effect of removing collections accounts from consumers’ credit reports. These removals were implemented as part of the National Consumer Assistance Plan, itself the product of discussions and an agreement between 31 state attorneys general and the three major consumer credit bureaus in 2015.
The plan also led to the removal of all tax liens from credit reports earlier this year.
Not all collections accounts were removed because of the changes, but a few of those that should be removed included collections accounts for medical debts less than 180 days old, traffic tickets and overdue library books.
The National Consumer Assistance Plan intended to fundamentally improve credit reporting data accuracy and quality, and as a part of the cleanup completely removed collections accounts on credit reports for 8 million consumers, according to the Federal Reserve Bank of New York’s report.
Those consumers who had a collections account removed from their credit reports may have seen a boost in their credit scores. The report also found that consumers who had collections accounts removed from their credit reports saw an average increase of 11 points in their Equifax Risk Score 3.0.
“These borrowers will certainly benefit in the long run from the cleanup of their credit reports, since higher scores are associated with better access to credit, to the job market, and even to the rental housing market,” the report said.
What does this mean?
The Federal Reserve Bank of New York report focused on the changes to consumers’ Equifax Risk Score 3.0, one of many credit scoring models used to generate consumers’ credit scores. But scores from other credit scoring models may have posted similar increases. Since the National Consumer Assistance Plan applies to credit reports with the three major credit bureaus — Equifax, Experian and TransUnion — the removal of collections accounts could lead to an increase in scores for some.
The National Consumer Assistance Plan requires the credit bureaus to remove collections accounts when the debt didn’t arise from a contract or other agreement to pay, like traffic tickets. In order to report collections accounts, the credit bureaus must have sufficient information to link the account to a person’s credit file, generally requiring the borrower’s name, address and an additional piece of identifying information, such as a Social Security number.
Because of these more stringent requirements, millions of collections accounts were removed from credit reports. But the results were mixed.
According to the Federal Reserve Bank of New York’s report, 18% of affected consumers saw an increase of more than 30 points in their credit scores. Approximately 10% of consumers saw no change at all, and roughly 20% saw an increase of fewer than 10 points. The report also found that credit scores actually declined for about 1 in 5 consumers.
Why does this matter?
Consumers with higher credit scores typically have an easier time borrowing money at lower interest rates.
The Federal Reserve Bank of New York report found that consumers with lower credit scores were more likely to see their scores increase because of these changes. That might be because consumers with higher credit scores are less likely to have collections accounts on their credit reports in the first place.
“Those who saw the largest boost to their scores were generally those with initially very low credit scores,” the report found.
“Given that their score remains deeply subprime even after the boost, it’s likely that the collections accounts were not the only thing holding down their score,” report said.
According to the report, nearly 80% of those who had collections accounts removed from their reports started with credit scores below 660. And consumers who noticed at least a 40-point increase began with scores of 529 on average. For context, your credit scores typically range from 300 to 850.
Unfortunately, only 20% of consumers with scores under 620 saw enough of a boost to lift them above 620. Many consumers with such low credit scores likely had other derogatory marks on their credit reports, which may have prevented those consumers from seeing a bigger boost. For them, the impact of this update may turn out to be negligible.
What can you do?
While these recent changes to credit reports come as great news for many consumers, it remains to be seen if the impact on credit scores is anything more than a one-time adjustment.
It’s worth remembering that some of the types of accounts removed in this update might eventually make their way back onto credit reports. The Federal Reserve Bank of New York’s report anticipates that the number of collections accounts reported will rebound as creditors begin supplying credit bureaus with the required identifying information.
Plus it’s important to keep in mind that just because certain collections accounts are not showing up on your credit reports, that doesn’t mean you no longer owe the money. Unpaid debts can be stressful and confusing, but making a plan to pay the debt may alleviate some of that stress.
We recommend paying your bills in full and on time to help avoid new collections accounts from popping up on your credit reports.
It’s also a good idea to check your credit on a regular basis. You can check your TransUnion® and Equifax® credit reports for free on Credit Karma. And Credit Karma’s Direct Dispute™ tool can help you dispute an error on your TransUnion® credit report.