Aug 28, 2021
The theme this week on the One Minute Retirement Tip podcast is: improving your credit score after age 60
Today, I’m talking about why your FICO score may soon become obsolete and what you should know about the potential overhaul of your credit score. As I was researching this week’s topic, I came across a news story about a new proposal that is under consideration in Congress right now.
According to USA Today, if passed, this piece of legislation would be a complete overhaul of the current credit score system. It would replace “the privately-run three-credit bureau system with a public credit registry [that would] operate under the umbrella of the Consumer Financial Protection Bureau.” (Source: https://www.usatoday.com/story/money/personalfinance/2021/07/02/congress-credit-score-overhaul-proposal-act/46965135/)
The proponents of these changes are critical of the current system for its shortcomings and assert that an overhaul would fix several problems, notably reducing errors on credit reports and make it easier for consumers to remove errors. While I think certain aspects of this proposal make sense (like shortening the time bad marks appear on your credit from 7 years to 4 years), I find this new piece of legislation unsettling for a couple of other reasons.
So at the risk of upsetting any of you (which is definitely not my intention), here’s why I think this proposal is problematic.
1) The bureaucratic nature of a national credit reporting agency would only increase the chance for errors on your credit report and increase the headaches in removing them. It’s all about incentives. A privately held business is going to be incentivized to make sure your credit report is accurate, because it’s only useful and credible for them if it’s accurate. Remember, your FICO score is meant to be a quick and easy way for lenders to determine your ability to pay back your debt. Their reputation relies on the accuracy of the credit score in predicting your ability to repay. If you had a credit score of 800, because you were working the system and really couldn’t pay back on your debts, the credibility of these companies would be completely shot. So in that regard, the profit motive has incentivized these companies to improve the accuracy of your credit score as a predictor of your ability to make good on your debts, and I think in this area - where it matters most - I think they’re doing fine.The federal government has no incentive whatsoever to ensure that your credit is accurate.
2) The federal government will be in charge of credit scores and your credit report. Importantly, and perhaps most concerning is that the government would have greater powers in setting the criteria that impacts your credit score. I think it’s a slippery slope that Congress and whoever is in charge will not be able to help themselves in degrading the usefulness of the credit score in order to achieve political goals. This backfired big time in the housing crash 15 years ago in the name of home ownership for all. Lending practices were loosened, in large part because of federal housing policy changes, and too many people owned homes who didn’t have the income or financial health to do so. As we all remember, it led to massive foreclosures and the economy crashing. They’re talking about loosening the standards for credit scores in this proposal, and I think it will do similar harm to people with lower credit scores if they revamped how your score is calculated, incentivizing them to take on more risk, more debt, and thus have a higher chance of bankruptcy or foreclosure.
So what should you do about these potential changes? First of all, I think it’s a good reminder to be vigilant about checking your credit report for errors. Errors are all too common in credit reports currently and I don’t think that will change anytime soon. You're entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies, so take advantage of it.
That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the One Minute Retirement Tip.
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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance