Okay this topic is nothing new…
Proposals to change the current credit score model have been around for the last 20 years or so.
These proposals to change the model come from policy makers who want the credit score models to be more transparent and defined. On the other side, the major credit bureaus are privately owned businesses so they naturally want to keep their control over how the models work.
Is there a chance that the credit score model could change soon?
First, how does the current credit score model work?
Currently, there are three major credit reporting bureaus: Equifax, Experian and Transunion.
As mentioned, these three credit reporting agencies are all privately owned businesses and consider their policies for how they determine a credit score proprietary. In other words, they have their “secret sauce” and that’s how they want it to stay.
This can create a lot of confusion with individuals when it comes to their finances… Credit scores are generally pretty vague.
A credit score is just a number that third parties, especially lenders, use to assess the risk of lending you money. The score is one way banks, credit card companies and other institutions assess the likelihood that you can or will be able to pay off any debts you accumulate. A higher credit score indicates that your current financial circumstances and your historical behavior demonstrate a willingness and ability to pay off any loans you may be approved for.
But these numbers vary from agency to agency. The credit score that you get from Equifax may not be the same credit score you get from Transunion or Experience.
It can be quite confusing.
Especially when you look into what actually determines that number… that’s where the proprietary information from each agency comes into play. It varies.
What are lawmakers proposing to change around credit scores?
Specifically, policy makers want these credit bureaus to better explain the elements that go into determining credit scores.
Your credit score affects so many financial decisions and policy makers are worried that these private agencies can be discriminatory in how they establish their scores.
Around 20 or so years ago, there was a credit score overhaul that required these credit agencies to provide a free credit report to individuals once a year. This report gives some insight into where an individual lies on the spectrum and how the score is determined, but they don’t technically have to give the score itself… (want to check your freed score, click here)
Policy makers say (and we agree) that that isn’t enough. Understanding the elements of the score without knowing your actual score doesn’t provide much insight and seems like a trap for individuals to spend money to find out their actual score.
Instead, policymakers are proposing to remove the current credit bureaus and create a credit score system that can operate under the umbrella of the Consumer Financial Protection Bureau (CFPB), which guards consumers against unfair or abusive practices.
“While public agencies are not perfect, at least they would not have profit-making as their top priority,” Wu told the House Committee on Financial Services during her testimony. “They would be responsive to public pressure and government oversight. They could also be charged with developing credit scoring models to reduce the yawning racial and economic inequality in this country.”
Though there are pros and cons to both a privately-owned and a government-owned credit score system. We can get into that another time…
This is why credit score dependent programs are…
Extremely controversial.
When individuals are unclear as to what determines their credit score BUT they rely on their credit score to get loans, refinance their homes, purchase a car, etc. how does one really know how to keep a great credit score?
There is so much controversy around credit scores that having programs that are dependent on your score doesn’t really make sense.
We know so many individuals don’t have good credit scores but that doesn’t mean they can’t repay their loans… However, that’s how banks or credit unions see it because that’s what the credit score tells me. There’s more than loan repayment that is taken into consideration in determining your credit score though.
We personally think that if you are hardworking, you should be trusted to repay your loan. Or, if you have good hardworking employees, you can and should be able to trust them.
That’s why TrueConnect’s No Credit Check Advance program doesn’t rely on credit scores at all.
To learn more about TrueConnect’s No Credit Check Advance program which does not require a credit score but may help you build your credit*, watch this short demo. And share it with your HR/Benefits team if it’s something you would use.
*Approval if you meet identification criteria
