AMES, Iowa – Building a credit history is a slow and sometimes vicious cycle. It is hard to establish credit, if you’ve never had it.
This is a common struggle for many young adults and college students who don’t have credit cards or a bank loan, two major factors used to calculate credit scores, said Jonathan Fox, director of Iowa State University’s Financial Counseling Clinic and Ruth Whipp Sherwin Endowed Professor. That’s why Fox and other financial experts say many Iowa State students may benefit from changes to credit report criteria, which will take effect this summer.
“These students are responsible money managers, but without a credit card or bank loan they are not establishing a credit history,” Fox said. “The use of information from cell phone or cable bills could help those with no other forms of credit.”
Jeanna Nation, a lecturer and financial counselor, also sees this transition as a plus for students. “Often these are the only sources of financial management students have encountered before they leave college,” she said. “For our students as a whole, I think this is good.”
Credit agencies not only will include bill-payment history when figuring credit scores, but also plan to remove tax liens and civil judgments from reports. Cynthia Fletcher, a professor and extension specialist in the department of human development and family studies who specializes in consumer economics, says regulators have pushed for these changes to protect consumers who find erroneous data on their credit reports.
In 2015, attorneys general from 31 states, including Iowa, reached a settlement with the three leading credit reporting agencies – Experian, Equifax and TransUnion – to improve credit report accuracy and enhance consumer protections. According to the agreement, the settlement addressed three areas of concern:
- Accuracy of information maintained by the reporting agencies
- Practices related to the investigation of consumer disputes of inaccuracies
- Reporting of medical debt
A 2017 report from the Consumer Financial Protection Bureau outlined similar steps to ensure accuracy and improve communication when consumers dispute results. Fletcher says credit reporting agencies receive millions of requests to correct credit report errors. According to a study mandated by Congress, one in five consumers has an error in their credit report
“It’s a fairly common problem. When you bring up a discussion of consumer credit or when I’m teaching that topic, there are always people who have frustrating stories of discovering errors in their financial history,” Fletcher said.
Millions could benefit
Only time will tell how these changes will affect consumers’ access to credit and the impact on the economy, Fletcher said. Industry projections show as many as 12 million Americans could see a boost in their credit score, but it could be as small as 20 points.
The removal of tax liens and civil judgments will limit the amount of information lenders have to assess a borrower’s ability to repay a loan. Industry estimates find consumers with liens and judgments are twice as likely to default on a loan, Fletcher said. However, this information is still available through public records, but verifying the accuracy is a challenge. She says there are potential pros and cons to increasing access to credit.
“If this affects people’s ability to get mortgages, those are real drivers of local economies,” Fletcher said. “The question is how many consumers will see significant change? The projections are relatively small. People with tax liens or civil judgments may see a sufficient boost, but lenders many not be accurately assessing borrowers’ risk.”
Request your report
Iowa State financial experts urge consumers to review their credit reports for errors. Federal law requires credit reporting agencies to provide consumers with a free copy annually. Fox says one of the first things he covers in his personal finance courses is having students review their reports for accuracy. In every class, there is always at least one student who finds a mistake on his or her report, he said.