Your credit rating suddenly jumped? Here's why

Published: Aug. 17, 2018 at 6:20 AM EDT
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If you've checked your credit report recently, you might have noticed a pleasant surprise -- an increase in your credit score. Overall, nearly 70 percent of Americans have seen their credit rating improve over the last year, according to an analysis by the Federal Reserve Bank of New York.

The reason: The impact of the National Consumer Assistance Plan, an initiative launched by the big three credit reporting agencies – Equifax, Experian and TransUnion -- in 2017 to address complaints about credit reporting errors. To placate state regulators, the firms changed their standards and tightened their reporting requirements.

Ironically, the change won't mean much to most people. According to the New York Fed, the average credit score rose only 11 points. But you can take comfort in knowing that some types of debt, including traffic tickets, unreturned library books, certain tax liens and recent medical liabilities will no longer be included in your score. Unexpected medical expenses can wipe out even those with a healthy credit rating. A Harvard University study showed that hospital and doctor costs accounted for 62 percent of personal bankruptcies.

These new standards will ensure that credit reporting agencies dot their "I's" and cross their "T's". These agencies now have to indicate when payment on an account is made, remove accounts that don't arise from a contract or agreement to pay, and report accounts only when sufficient information exists linking it to an actual person's credit file. In other words, it has a name, address, Social Security number or birth date.

The Fed researchers also said these new standards resulted in a big drop in the number of people with collections accounts on their credit report since the new regulations took effect last year.

The number, which declined from 33 million individuals to 25 million, is good news for the nearly 20 percent who saw their credit score rise by more than 30 points. But the news is tempered by the fact that many of their credit scores were so low that it might not make much of a difference. Since their credit was tarnished by too much negative information, that small gain still might not help them get a job, mortgage or – in many states – auto insurance.

"It's likely that those who saw positive changes in their scores wouldn't qualify for credit that required higher scores anyway," said Beverly Harzog, a credit card expert with US News & World Report.

The three credit reporting agencies and FICO – a data analytics company that provides an all-important credit score based on the data it obtains from these agencies – have now had a year to absorb these new regulations. That means they will not be caught off guard when an individual suddenly has a new and higher credit score.

According to its research brief, "FICO observed no material impact … resulting from the credit reporting agencies enhanced public record standards." One reason: People with lower credit will still likely "have additional derogatory information," and so score relatively low even after some of the problematic information is removed.

One of the Fed researchers, senior data strategist Joelle Scally, said the ultimate effect of the reporting bureaus' new standards "remains to be seen."