THE END OF CREDIT SCORES | Major Changes Explained
Recently, there is a push to end the current credit scoring system, and to create a new credit score based on different criteria – here’s what this means for you – Enjoy! Add me on Instagram: GPStephan
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Why the new plan wants to get rid of the current credit score:
First, the 3 big credit scoring agencies: Experian, Equifax, and Transunion – are all privately held, FOR PROFIT corporations – that gather data, and then develop their own, independent algorithms to predict how likely YOU are to re-pay a loan.
SECOND, the current credit scoring system is often HIGHLY INACCURATE – and it’s difficult to correct false information. In fact, according to the FTC, 20% of ALL people have at least 1 error on their credit report….and those errors have the potential to lower your credit score, hurt your ability to get a new line of credit, and cost you a higher interest rate.
THREE: The current credit scoring model leaves a LARGE PORTION of the population “credit invisible.”
That’s why 20% of the US Population falls into the “invisible” category, where they don’t have a credit score, simply because they’ve never needed credit to begin with.
FOUR – The Credit Scoring Model contradicts itself…a LOT.
Here’s just a few examples:
-If you want a good credit score, you’re REWARDED for having higher credit limits, along with the ability to take on even MORE DEBT, because THAT is how you establish your payment history.
-You’re also REWARDED for keeping your accounts open AS LONG AS POSSIBLE, even if you don’t use those accounts – otherwise, the average length of your account history will drop, which then lowers your score.
-You’re ALSO REWARDED if you take on different TYPES of loans, like credit cards, auto loans, mortgages, and leases – because then, lenders see that you can responsibly handle multiple types of debt…and that’s GOOD!
-But, you can also get PENALIZED for opening up TOO many credit lines, too fast…because that shows up as a hard inquiry on you report, and that’s BAD.
AND FIFTH – they say that the credit scoring system excludes too many people.
Since credit scores reward extensive credit history – younger borrowers suffer from lower credit scores, and higher interest rates – just because they aren’t old enough to have build up a proper profile. Lower income applicants are also 8x more likely to lack credit history, because they’re more likely to rent, and rent payments don’t show up on a credit report, which means they have a lower credit score, which means they’re charged a higher interest rate…which means, they have less money left over, and the cycle continues.
So, now – the SOLUTION being proposed is creating a NEW, MORE FAIR SYSTEM that would work like this:
They want to create a publicly run Credit Reporting Agency within the Consumer Financial Protection Bureau that would eventually replace the current for-profit credit system, with a NEUTRAL, NONPROFIT PUBLIC entity.
As they say, it would deliver transparent scoring, provide greater data security and offer a publicly accountable way to resolve disputes. They would also CAP the interest rate no higher than 36%, clean up debt collection practices, and even potentially – discharge student loans in bankruptcy.
Things like bank account data, rental payments, and utility payments would also be a factor in determining a credit score, and negative information would fall off after 4 years, instead of the 7 it is now.
If you already have a good credit score – just continue to pay your rent and utilities on time…and you’ll be fine. And if you’ve got a BAD credit score…then you should continue paying your rent and utilities on time.
For business or one-on-one real estate investing/real estate agent consulting inquiries, you can reach me at GrahamStephanBusiness@gmail.com
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