Bill to enhance poor credit scores will backfire, critics say
WASHINGTON — Legislation to enhance credit scores by allowing consumers to include data about their monthly bills has broad bipartisan support, but some consumer advocates and others question whether the legislation may backfire on those it is meant to help.
The measure, which passed the House earlier this month and is authored by Rep. Keith Ellison, D-Minn., is intended to allow consumers to benefit from positive information about lease, telecommunications and utility payments in their credit reports. An identical version has been introduced by Sens. Tim Scott, R-S.C., and Joe Manchin, D-W.Va., in the upper chamber.
But critics warn that Ellison's bill could open a Pandora's box. Not only will it be difficult for landlords and service providers to furnish the data, they say, but observers also note it could highlight negative information — such as late payments — that could hurt a consumer's credit standing, particularly consumers with a thin credit file.
“While it’s well intended, I don’t think it will actually achieve what it’s intended to do,” said Chi Chi Wu, a staff attorney at the National Consumer Law Center.
The legislation would give consumers who are currently “credit invisible” the opportunity to have a credit history that includes their telecommunications and utilities payment data. But legal experts say the inclusion of such data could result in those consumers actually having low credit scores.
“Because the data provision will not be universal, and because many consumers’ payment histories may not be pristine, it is possible that the bill may not open up access to credit in the ways that the bill’s authors are hoping,” said Jeffrey Naimon, a partner at Buckley Sandler.
The NCLC echoed that point in a letter to lawmakers, saying that establishing a score based on utility reporting for "thin file" or "no file" consumers could provide a credit score that does not reflect well on them.
“It's better to have no credit history than a bad one,” Wu said. “For one thing, credit reports are also used by employers and insurers. In that context, a ‘no file’ is better than negative information. Also, some high-cost lenders, like fee-harvester credit cards, target consumers with poor credit histories.”
Still, proponents of the legislation say it will open up access to credit for low-income and minority consumers who don’t have credit histories.
“Tens of millions of Americans, primarily from low-income and minority backgrounds, either have no credit history or credit histories so limited that they cannot be scored,” said a spokesman for Ellison. “As a result these folks pay more for things like car payments and security deposits on cellphones and apartments. This bipartisan bill, which has passed the House four times, will help ensure that anyone making on-time rental, utility, or telecom payments will be able to begin building good credit and accessing the benefits that come with it.”
But observers also raise the concern that landlords and cellphone carriers are not currently required to furnish credit data to the three major credit reporting agencies: Equifax, Experian and TransUnion.
If the legislation were enacted, and the credit bureaus were able to include utilities or telecommunications payments, some of the larger landlords and telecommunications companies might be willing to furnish the data. But smaller property managers, such as single condominium owners, and smaller telecommunications companies servicing lower-income users may find furnishing the data to be too time-consuming.
“You might find that the largest cellphone carriers and landlords would already have sufficient data integrity resources and investment that they would be able and willing to furnish data to the consumer reporting agencies, but smaller landlords and less sophisticated carriers may not be willing to furnish,” said Naimon.
But other consumer advocates say the overall benefits of the legislation would outweigh the potential negative impacts it could have on consumers.
David Newville, director of federal policy at Prosperity Now, said many individuals consistently pay their apartment rents or cellphone bills on time, but those timely payments are not reflected in credit scores. That could hinder their ability to get mortgages as well as the rates at which they pay interest on loans.
“If you are the kind of person who is able to scrape it together and pay your bills every month, you don’t get recognition,” Newville said.
Newville acknowledged that some individuals will take a hit if the legislation moves forward and more data is included in their credit reports. "That is a true fact,” he said.
In a blog post on Prosperity Now’s website, the organization said the benefits of the legislation outweigh the harm.
“The vast majority of families stand to gain from more inclusive credit reporting,” the blog post said. “More than a decade’s worth of evidence supports the inclusion of rent, utilities and phone payments, and studies indicate that households earning less than $20,000 per year experienced the greatest boost to credit access when utilities and phone payments were included.”
The organization highlighted a study by the Credit Builders Alliance that showed participants who initially had the lowest credit scores saw the greatest increase in their scores after rent reporting was implemented.