Over the last 15 years, the credit score has become a vital part of every consumer’s financial life. Good or bad, politicians have recently got more involved to have their impact on consumer’s credit scores. As one observer correctly pointed it out, those with higher credit ratings are losing out while those with lower credit scores are benefitting.
There are several situations happening today that would never happen even a few years ago with you credit report. If past guidelines were followed, credit scores would have been much lower today for millions of consumers. Thanks to some favorable changes, many have been able to benefit from it. Let’s go through them.
- Skipping Mortgage Payments
Throughout the financial crisis, many homeowners had to go into forbearance or other programs to lower their payments. Practically every time, late payments appeared on their credit report which impacted their credit scores.
Through the Covid-19 Pandemic, mortgage payments were skipped and such payments were not reported as late payments. Obviously, this has helped those with lower credit ratings achieve a higher credit score.
- Skipping Auto Loan Payments
Skipping auto loan payments really was not an option through the Great Recession. If payments were missed, late payments were reported.
Through Covid-19, many consumers skipped their payments on auto loans without being reported as late to their credit reports. Again, this has benefitted those with insufficient means to pay their bills on time.
- Skipping Student Loan Payments
Many students have utilized this program to skip their regular monthly payments. With President Joe Biden’s recent authorization, many borrowers have not made a student loan payment in almost two and a half years. Who is paying the interest? The taxpayer.
This never happened prior to the Covid-19 pandemic. Students could skip their loan payments under a few circumstances. Now, there are skipped payments with practically every federally-backed student loan no matter what the circumstance.
Now, President Biden is looking at removing all late payments from student loans.
- Removal of Judgments and Collections
Within the last few years, the Consumer Financial Protection Bureau has required the credit bureaus to remove practically all judgments and tax liens. To give a background, there were some problems with accuracy. However, there was still a lot of accurate information reported. Judgements and tax liens are currently not reported on credit reports. This benefits those that are behind on taxes or have lost in court for a bill that is due.
- Removal of Collection Accounts
Many medical collections are being removed from the credit report. Medical collections under $500 are not being reported. Also, medical collections are removed after they are paid. Finally, a medical bill cannot go to collection until they are at least 12 months old.
This has benefitted many consumers that do not pay their medical bills on time. As a result, more medical service providers are requiring payments up front.
What has happened? Those that have missed payments or had tax liens, collections or judgements still have similar levels of loan default. Without reporting such information to the credit report, credit ratings for many consumers are higher than what they should be.
As a result, lenders and insurers are moving the goalposts and will require higher credit scores to get the lowest interest rate or premium. That means those will above average credit scores will be charged more in fees and higher rates from lenders because those with credit issues will have higher scores than what they should be.
For example, say 5% of borrowers with a 620 credit score default on their auto loans. Say only 2.5% of borrowers with a 640 credit score default on their auto loans. Obviously, those with 640 credit scores will get loans with lower interest rates and fees. However, if the 620 borrowers are now at 640, and still have the default rates of a 5% (for a 620 credit score), the rates and fees will go up for those with 640 credit scores too.
Those in turn will come back and cost everyone else with higher credit scores. Besides, what are we teaching? It is alright to take out a loan and not pay it back according to the terms. This could only end bad if it goes too far. At some point, we have to pay the bills that we say we are going to pay.