Americans seem to have a love-hate relationship with their credit scores. They love it when the system is humming on all cylinders and hate it when credit scoring models unfairly disparage them.
Why? Because a lower credit score leads to higher interest rates on approved credit and outright rejections from creditors on major household financial initiatives like mortgages, auto loans, and credit cards.
A concrete example :
Equifax, (EFX) one of the three major credit rating agencies (alongside Experian (EXPGY) and transition (TRU) ), said it misreported consumer credit scores between March 17 and April 6, 2022.
The snafu hurt the credit scores of millions of Americans, resulting in negative responses for mortgages, car loans, credit cards and other credit applications.
More than 300,000 Equifax accounts were affected by credit reporting errors, with some credit scores dropping 25 points or more.
“In April, we identified an issue in a legacy US on-premises server environment that needed to be migrated to the new Equifax Cloud infrastructure,” said Mark W. Begor, general manager of the Atlanta-based company. “This issue, which was in place over a period of weeks, impacted how certain credit scores were calculated.”
The rating issue was resolved in April, and Begor said Equifax had spent the past three months working with customers to determine how the issue may have affected consumers. “We will also engage a third party for an independent review,” Begor said.
Mistakes hurt consumers
The damage caused by faulty credit score models can be worse than credit consumers realize.
A recent report from LendingTree found that 42% of Americans have been denied a credit product because of their credit score in the past year, with credit score errors like the Equifax flub playing a role. “hitting”.
These data come from the study:
· 42% of Americans say their credit scores have prevented them from obtaining a financial product in the past year. This figure rises to 74% among those with bad credit. Credit cards (25%) and personal loans (12%) are the top products consumers say they’ve been declined because of their credit.
· 40% of Americans don’t think their credit scores accurately reflect their financial responsibility. This is especially true for people with poor credit (60%), millennials (47%) and women (44%).
· Payment history is the most important factor in calculating a credit score, but 50% of Americans don’t know it. GenZers (61%) and Millennials (60%) are the most likely to answer this question incorrectly. But only 39% of Gen Zers say they have a payment history should be the strongest, weakest factor among the generations.
· 44% of Gen Zers don’t know their credit score, while 25% say they don’t know how to find out. Overall, 19% of Americans say they don’t know their credit score and 12% don’t know how to check their credit score.
Why credit scores are so chaotic
The main and most obvious reason why credit ratings – and credit ratings – are so out of balance is the outbreak of covid-19.
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“Many people have lost their jobs, had their pay cut, or become underemployed out of desperation to find work,” said Brian Greenberg, CEO of Insurist, Scottsdale, Arizona. “Because their income was affected, many families were unable to earn timely payments on unpaid debt or pay new medical bills, which hurt their credit.
Inflation has also reduced credit ratings in America.
“With a larger percentage of their monthly budget spent on food and fuel, people are finding it increasingly difficult to keep up with personal and student loan repayments, to the detriment of their credit,” Greenberg told TheStreet. com.
Additionally, although many individuals’ credit ratings have rightfully dropped, there is a problem with accuracy.
“According to a Consumer Reports survey, 34% of consumers found an error on their credit report in 2021,” Greenberg noted. “It negatively impacts these people’s ability to get credit cards, get approved for personal loans, and it can even negatively impact their job opportunities.”
Many lenders also tightened their lending at the start of 2020, but started extending more credit through the end of 2020 and most of 2021.
“The additional credit was offered during a period of record average credit scores and declining unemployment,” said Chad Prashad, president and chief executive of World Acceptance Corp., Greer, SC “However, inflation has had an impact on day-to-day spending and there is growing concern that when there is less left at the end of the month to pay bills, consumers may miss payments.
Now lenders are also turning down applicants they would have approved last year.
“This is especially true for those with less than perfect credit,” Prashad told TheStreet. “Forty-five million Americans have subprime credit scores (ie, scores below 620). Due to the increased risk of default when lending to consumers with weak or new credit, traditional banks and lending institutions will not offer them loans.
Action Steps to Repair and Improve Credit
What steps can people take to improve their credit score and increase their chances of getting a good loan or credit card?
If you suspect a problem or are just motivated to build a stronger credit score, try these tips.
Watch your credit score like a hawk. With the Equifax fiasco in mind, the best way to fix errors in your credit report is to closely monitor your own credit report.
“Regularly checking your credit score also helps identify errors that could lower your credit score,” said Bill Ryze, certified financial consultant at Fiona, a financial services platform. “So ask for your credit report from time to time and check for errors. If there are any, contact the bureau or credit listed company to make corrections.
Build your credit. People with little or no credit need to build up a safe credit risk history. “They can do this using credit loans or secured credit cards,” Greenberg said. “They can also be added as an authorized user on someone else’s credit card.”
Don’t miss payments. Missing payments hurt your credit score, while having a history of on-time payments can help you achieve a great score. “Payments that are 30 days late can be reported to credit bureaus and hurt your credit scores,” Greenberg noted.
To avoid missed payments, set up automatic payments for minimum amounts due (you can always pay more) and contact your credit issuers if you’re having trouble making payments due to financial hardship.
Limit the frequency of your credit requests. Every credit application you submit can lead to a thorough investigation, which can hurt your credit score. “Opening new accounts also decreases your average account age, which negatively impacts your score,” Greenberg added.