2023-07-09 02:22:11
NEW YORK –
A low credit score can affect your ability to get a loan, secure an attractive interest rate, or increase your credit card limit.
Some of the reasons for a low credit score are out of your control, such as debt from unexpected medical expenses or lack of credit history. Now, rating agencies are working to improve access to credit, giving people more time to pay their medical bills before the debt shows up on their reports, and removing other debts altogether. They are also making it easier to include the payment of rent, services and other recurring bills, a great help for those who need credit the most.
This is what you need to know:
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WHAT IS A CREDIT SCORE AND WHY IS IT IMPORTANT?
Simply put, a credit score is a formula that lenders use to decide how likely you are to repay a loan. If they think it’s risky to lend to you, you’ll have to pay more to get a loan or you might not get it at all.
The factors that go into calculating a credit score are complicated, and advocates say it’s a good thing that credit reporting agencies have started making it easier for consumers to prove they’ll be able to pay back the money they borrow. It is especially important for so-called “thin credit” consumers, that is, those without a strong credit history, typically young or low-income.
“I see action being taken to balance the credit rating,” said Rosalyn Glenn, a financial adviser at Prudential who focuses on expanding financial access. “For example, adding rental payments to credit reports, since there is a segment of the population that rents and does not own it. That’s exciting, because qualifying can give them a shot at better rates on services like insurance and loans. I think progress is being made in that direction.”
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WHAT IS HAPPENING WITH THE DEBT FOR MEDICAL EXPENSES?
After conducting industry research during the COVID-19 pandemic, the three most widely used credit reporting agencies found that consumers with medical expenses were just as likely to be creditworthy as those without.
As of July of last year, paid medical debt is no longer included on consumers’ credit reports, and the time period before outstanding medical debt appears is one year, an increase from to the previous period, which was six months. This gives people more time to work with insurance and health care providers to pay off the debt.
In the first half of 2023, the credit rating agencies Equifax, Experian and TransUnion will also remove medical debt from credit reports if it is less than $500.
When Jonathan Alvarado, 25, was in a car accident last year, he knew that medical bills wouldn’t be the only hit to his finances. Alvarado, a landscaping contractor from Plainfield, New Jersey, who prides himself on his prudent financial practices, had knee surgery early in his busiest season, which affected his productivity.
Alvarado says he only realized the consequences for his access to credit in retrospect. Even after receiving the insurance payment, he still owed about $1,200, which he took several months to pay off. During that time, his credit rating dropped to 680, which is still considered good, but it was lower than it had been. When he finished paying off his debt it amounted to 775, the highest he had ever had.
It was only when Alvarado examined what had caused that dip and rise that he realized it was all due to his long-standing medical debt.
“A difference of almost a hundred points,” said . “If he had known, he would have settled it before.”
David Anthony, 43, a service truck driver in Baltimore, learned that medical debt was hurting his credit when an employer pointed out the high interest rate he was paying on a car loan. After reviewing his score, Anthony questioned the inclusion of certain bills for medical expenses, some of which he had already paid off, ultimately allowing him to raise his score from just over 500 to above 700.
“I got a very good loan for one of the cars I have now,” he said. “That first car had an interest rate of 17%. That was what alarmed my employer.”
Now Anthony has a loan with an interest rate in the single digits.
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HOW ELSE CAN YOU INCREASE YOUR CREDIT RATING?
While consumers have long been able to add rent and utility payments to their credit reports, in recent years the bureaus have made it easier to include it, and less expensive, too.
Experian, for example, has an option for consumers to sign up for a service, “Experian Boost,” which takes these kinds of payments into account without charging a fee. (In other cases, companies may charge the tenant or landlord for the work of including the additional information on credit reports, which is not added automatically.) Frequently those who use the program report an increase in their rating.
“You’re making a payment once a month for a service you receive, much like getting a loan,” said Rod Griffin, a financial health activist at Experian. “What we found in our research was that those kinds of bits of information do indicate that a person might be less of a credit risk than their report might if they have very poor credit.”
For those with thin credit files or scores below 680, Experian has identified an average increase of about 19 points, according to Griffin. Others may register increases of 12 or 13 points. About two-thirds report score improvements, but the tool is useful even for those who haven’t built extensive credit histories, she added.
To use the tool, you give Experian permission to capture your monthly payment history and bank details, whether it’s a cellular plan, water bill, streaming service subscription, or rent payment.
For Brandon Reese, 41, a financial planner from Dallas, Texas, it made sense to help his 20-year-old daughter, a nursing student in San Antonia, sign up.
“The first time he opened a line of credit, his rating went down,” he said. “But with this we were able to increase it by approximately 15%.”
Reese said she also advises her retired clients to take advantage of these programs.
“Seniors also have low credit scores because they’ve already paid off all their debt,” he said. “So your credit goes down. But now — (payments to) Verizon, AT&T, Hulu, the Disney package, Netflix, your gas bill — fintech companies can justify those payments as payment histories.”
Technology companies that provide services similar to Experian Boost, either for free or at low cost, have proliferated.
“Today that’s one of several things we encourage people to do,” said Silvio Tavares, CEO of VantageScore, another national provider of consumer credit scores. Like the FICO credit bureau, VantageScore uses credit reports compiled by Equifax, Experian and TransUnion to calculate a credit worthiness score using its own algorithm. “If you’re doing credit-worthy things like paying rent and utilities on time, you want to include it.”
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HOW DO I SUBSCRIBE?
To include additional credit information in your report, you have several options. One is to sign up for ExperianBoost or Ultra FICO from those companies’ websites and give them permission to access your checking, savings, or money market accounts. This will allow the credit bureau or credit reporting company to analyze your spending, savings, and recurring payment histories. While other technology platforms offer similar services, these two alternatives are free.
___ The Associated Press receives support from the Charles Schwab Foundation to produce educational and explanatory reporting that advances financial literacy. That independent foundation operates separately from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.
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