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Consumer credit report formula may change

Oct 27, 2013 Walt Wojciechowski

Consumer credit reports play a major factor in which individuals do and do not get approved for loans from lending outlets. Within these reports are notes about a person's financial and payment history, which is used to determine a three digit credit score. Those three simple digits are extremely important to consumers and lenders, as it highlights an individual's ability to stay current on payments and budget effectively.

How that number is calculated may change in the near future if a bill before congress is approved and signed into law. According to MarketWatch, lawmakers are pushing to pass legislation that would factor non-loan payments into the consumer credit score equation. Labeled the "Credit Access Inclusion Act," advocates of the drafted policy believe that it would help Americans improve their credit scores.

With the national economy still in a state of recovery, legislators are taking all possible steps to ensure that consumer finances return to a robust state. If implemented, the bill's sponsors claim that the inclusion of data regarding utility, rent and cable bill payments would allow a large portion of citizens to enhance their credit scores.

"Our current credit reporting system leaves more than 50 million people without a credit score…Including more data in credit reports will make it easier to get and improve a credit score," said Minnesota's Democrat Keith Ellison, a co-sponsor of the bill, according to MarketWatch.

Dissenters say more information is detrimental
Despite the claims made by Ellison and the bill's supporters, some Congressmen believe the inclusion of more data for credit bureaus to scrutinize will have an adverse affect. Opponents of the bill contend that augmenting the number of accounts that can be monitored only increases the chance an error or mistake occurs.

The pending bill would penalize consumers for being tardy on all utilities and rent payments if it becomes law. John Ulzheimer of called the bill a "double-edged sword".

At the moment, lending standards are still significantly more complex than they were prior to the economic downturn. A change in how scores are calculated could have a major impact on consumers and lenders because the ability to get loans could increase or decrease depending on what spending habits Americans prioritize in the future.

Consumer behavior holds the key
Recently released data suggests that American consumers are becoming more frugal and are paying closer attention to their finances. Time Magazine cited a survey from Fidelity that found 61 percent of respondents said they are prepared for taking on financial challenges. That was an increase from 45 percent who said they were prepared in a similar survey conducted just before the Great Recession.

The source noted that those who feel more prepared have generally taken the necessary steps to gain better financial footing. They have reduced their debt and started to save more money to ensure that they have the funding they need in case an economic emergency strikes.

This could indicate that America's consumers are more capable of meeting required payments than before the economic downturn struck. If this is indeed the case, additional credit scoring data may actually improve the credit scores across the board.

However, it's difficult to predict what consumer spending habits will be in the coming months and years. Currently, increased financial vigilance is simply a trend, most likely a product of financial struggle that came about with a poor market. Only time will tell if these short term shifts in consumer behavior become sustained habits that will hopefully benefit the lending environment.