Credit Score – Why It’s Important and How It Works

With the Coronavirus pandemic sending millions of Americans scrambling to make ends meet, another type of economic fallout is bubbling in the background: worsening credit status due to late or unpaid bills.

But making a bad situation worse, some credit scores are being mistakenly dinged by the very lenders that, thanks to the protections of the Coronavirus Aid, Relief, and Economic Security Act passed in March 2020, are supposed to be providing payment relief. The law lets you postpone payments on federally backed mortgages for up to a year, suspends all payments on federal student loans through Sept. 30, and—supposedly—ensures that your credit isn’t negatively affected if you take advantage of these provisions.

But reports of people whose credit scores are nonetheless wrongly being harmed keep piling up, both in media reports and in stories shared directly with Consumer Reports by readers.

A credit agency representative acknowledged that mistakes are “bound to slip through the cracks” as lenders try to comply with the new credit law while millions of borrowers are seeking financial help.

Meanwhile, experts say more problems are likely to emerge because of inconsistencies in the way creditors are reporting disaster-related accommodations.

You may wonder if these problems merit your attention right now. Credit scores (numerical grades derived from the information in your credit reports that are used to judge your worthiness for future credit) can indeed seem trivial when many consumers are struggling to put food on the table, maintain a roof overhead, pay utility bills, and buy prescription drugs.

But if your short-term needs are well in hand, she adds, it’s worth paying close attention to your credit report. That’s because it can have serious long-term effects on your ability to weather the crisis and rebuild your financial health after the worst has passed.

Experts say the inability to access credit was one of the reasons it took many Americans so long to dig out of the previous financial crisis. And some lenders are already tightening the flow of credit by closing credit card accounts, lowering credit limits, and slowing or stopping the processing of applications for refinancing, home equity lines of credit, and mortgages.

Credit report blemishes, which typically stay on your file for seven years, can even affect your ability to get a job, rent an apartment, or secure certain types of insurance, Wu says. Here’s what you can do to protect yourself:

Talk to All Your Lenders Right Away

That means even before checking your credit reports, because the best way to keep your report clean is to prevent negative information from landing there in the first place.

The credit protections of the coronavirus relief package apply to “accommodation” agreements with any creditor to defer, decrease, or modify any consumer debt, not just the ones in categories required by the law, such as federally backed mortgages and student loans. That means your credit reports shouldn’t be blemished if you persuade a lender to postpone payments on your auto loan or credit card debt as well as a nongovernment-backed mortgage and student loans. And many lenders across the spectrum have been encouraged by federal regulators to agree to such accommodations.

But you must reach out: The law provides no credit protection if you’re late paying your debts and don’t get an accommodation, in which case your credit reports will probably reflect a delinquent account regardless of why you were unable to pay.

And make sure to call them all, even if the balance due is relatively small. Even a single account that’s more than 30 days past due can reduce your credit score by up to 100 points.

Get Your Credit Reports

With credit reporting problems exacerbated by the pandemic, the three major credit reporting agencies—Experian, TransUnion, and Equifax—are letting people check their reports free on a weekly basis, at least until April 2021, at annualcreditreport.com. Pulling reports online from all three agencies typically takes 10 or 15 minutes.

Doing so weekly is overkill for many people. If you’ve been able to maintain your income and have been making all your payments on time, check each of the three reports about every six months, Wu says. (In normal times, it’s enough to check each report once a year.)

If, on the other hand, your financial situation has taken a hit because of COVID-19 and you agreed to a forbearance or a deferral on a loan, Wu says to check your reports monthly for a while. That’s how often lenders usually upload data to the credit reporting agencies.

Challenge Them for Errors

Even in ordinary times, credit reports are rife with error. A landmark 2013 report by the Federal Trade Commission found that 1 in 5 contained a verified error and that 1 in 20 had an error significant enough to cause credit to be denied or offered at a higher cost. And complaints about credit agencies now represent 38 percent of all complaints to the Consumer Financial Protection Bureau, more than any other category. Here are the errors to especially watch out for, followed by tips on how to dispute them.

Mixed files. These common errors occur when an account or debt belonging to one consumer is incorrectly attributed to another person, possibly with the same name or a similar one. To spot these errors, look for information about a loan or debt that doesn’t belong to you.

Out-of-date information. Make sure closed accounts, with credit cards for example, aren’t listed as open in your credit reports. And if you had a credit problem that was resolved, make sure it disappears from your report after seven years, as it’s supposed to. Sometimes these passed delinquencies are incorrectly “re-aged,” thereby restarting the period during which the negative information stays on your report.

An incorrect change in status. If your creditors agreed to let you defer payments, the coronavirus aid package explicitly says your credit status should freeze at the time you accepted the accommodation. So if an account was current at that point, it should still be reported as current. If you were already behind when your payments were postponed, your status should be no worse than it was before. But it can be better: If you manage to catch up on your payments during the accommodation period, you should be reported as current on that debt.

Mortgage loan errors. An emerging problem concerns mortgage lenders that have been using “special comment codes” to explain the status of accounts in their reporting to the credit agencies. Under ordinary circumstances, lenders use an “AW” code to indicate that a borrower has been affected by a natural or declared disaster, “CP” for a disaster-related forbearance, and “D” when account payments have been deferred.

But the coronavirus relief law doesn’t specify how—or even whether—mortgage lenders should use these codes for COVID-19-related accommodations, Wu says. As a result, they’ve been used inconsistently.

In addition, according to a recent FinRegLab report, at least three mortgage servicers have placed “CP” codes on accounts when consumers simply called to inquire about forbearance but decided not to take it—and in some cases even when no call was made.

These coding errors and inconsistencies shouldn’t have a direct impact on consumer credit scores, Wu says. But many mortgage lenders, as well as some auto lenders, landlords, and employers, look at full credit reports, she says, “and who knows how they’ll be interpreted.”

Her advice? If you haven’t accepted an accommodation, insist that the coding be removed. If you did agree to a forbearance and the lender insists on coding, ask for the AW code.

Student loan errors. Coding errors have also had an impact on consumers who have federal student loans. In addition to suspending all payments for these loans through Sept. 30, 2020, the relief law specifies that a suspended payment should be treated by credit reporting agencies “as if it were a regularly scheduled payment made by a borrower.” But student loan servicer Great Lakes coded accounts of some 5 million borrowers as having been “deferred,” which caused many of their credit scores to decline.

The problem appears to have been addressed by Great Lakes. But if you have outstanding federal student loans, experts recommend making sure that your credit reports don’t show a deferment on those accounts and that your credit score wasn’t affected.

Keep in mind that it’s often necessary to dispute an error with more than one of the three major reporting agencies. And although they’re the ones that have a legal obligation to investigate your complaint, you should also notify the creditor behind the disputed information.

Wu says the credit agency dispute forms, either found online or sent in the mail along with your credit reports, often limit your options. So either skip the forms entirely and write your own letter explaining the errors, or supplement the forms with additional details and comments.

After printing copies to keep, submit your documents via certified mail to the address on your credit report, and request a return receipt for your records. And keep a detailed list of every document you send to the credit reporting agencies and the creditor involved (conversations, too).

Finally, each credit agency must send you written results of its investigation within five business days of its completion. And if a creditor finds that your dispute has merit, it must notify the three agencies so that they can correct your file.