Congress' student loan program

Rating Congress’ new debt bill: 14 things (good and bad) you gotta know

Rep. Maxine Waters made a few headlines yesterday — but not a whole lot — when she released something called The Fair Credit Reporting Improvement Act of 2014.

The California liberal wants to update a 44-year-old law that regulates how your credit information is stored — because when the law was written in 1970, the Internet wasn’t a thing and student loans weren’t a crisis.

During a week when a new iPhone was released and the NFL season got rolling, Waters’ bill didn’t get a heck of a lot of attention — even though, if it passes, it will affect everyone who’s not rich.

From The Hill to the Wall Street Journal, the reporting focused on a small handful of the bill’s 41 pages. Debt.com read the whole darn thing and, line by line, found 14 distinct proposals that deserve a mention. Below, we explain them in plain English and rate their effectiveness.

Of course, Waters’ bill still faces the meatgrinder of Congressional politics, so it’s not likely to survive in this version — if at all. Still, her ideas are bound to create a conversation worth having. So here’s how her proposals stack up…

1. Black marks fade faster

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What it does: A “black mark” on your credit report means you paid a bill a month or more late, or not at all. Right now, most of these stay on your record for seven years before finally fading away. Waters wants to change it to four.

What we think: This is good for people who learn from their mistakes, but doesn’t rate as great because it also rewards people who wait out the system. That could discourage the people who work hard to pay off their debts ASAP.

In other words, Group A is making hard choices and working to pay back their loans. Group B just waits four years for the bad debt to disappear. Why should they be treated equally? Waters may think she’s doing consumers a favor, and she is. Good ones as well as bad ones.

 2. Pay your debts, forget your debts

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What it does: Right now, if you pay off a big debt or even settle it — say, talk a collector into taking a percentage of a big bill and forgiving the rest — that penalty stays on your credit report for seven years. What’s the big deal? While creditors like the fact you got rid of that debt, they still judge you harshly for getting into it in the first place. Waters wants your paid debt — she explicitly cites medical debt — gone in 45 days.

What we think: If you’ve ever been sent to collections, and a third of all Americans have, this will help in the same way we mentioned in No. 1 – with the same problem. Will Americans who pay off or settle their debts for a fraction of the face value prosper from having better credit scores? Or will they say, “Hey, 45 days? Let the good times roll!”

3. Private student loans get a major boost

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What it does: When most people talk about student loans, they’re talking about federally back loans. In 2011-12, about six percent of student loans were private, meaning the government doesn’t back them or control them.

That also means there are few rules about them — and unlike federal loans, there aren’t government-backed programs to lower or even forgive your payments. Waters wants those who default on private loans to have that negative information removed from their credit reports after they make nine consecutive on-time payments.

What we think: No downside here, because there’s no foreseeable way this break can encourage bad behavior. You make nine straight on-time payments, you deserve some love.

4. Set standards for setting standards

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What it does: Who decides what makes a good credit score? Credit reporting agencies do, based on lots of secret, complicated testing with massive amounts of consumer data. They decide how much a late payment or a low balance counts for. They set the goal posts and decide when to move them.

Waters wants to make sure the Consumer Financial Protection Bureau — which is supposed to oversee all financial products for consumers — has the authority to routinely check up on those rules and make sure they make sense. In the words of her bill, the CFPB should “validate credit score algorithms.”

What we think: On one hand, this sorta assumes the credit bureaus don’t know how to do their jobs. But we’d rather they have hurt feelings than consumers get ripped off.

5. Nix any credit factors the government doesn’t like

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What it does: The bill has some strange language prohibiting “certain factors related to federal credit restoration programs” from being considered in credit scores. There are credit restoration programs, but if you Google the phrase “federal credit restoration program,” the only result is this bill. Fortunately, the bill defines it for you: “any program that the Bureau determines appropriate.” Unfortunately, that means there’s no way to tell what that means.

What we think: This is so vague and open-ended, there’s no way it survives the legislative process. It basically gives the CFPB absolute power over credit scores — they can exclude anything they want. This will give limited-government Republicans fits.

6. Clean up confusing marketing

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What it does: The CFPB will work with the Federal Trade Commission to develop new rules forcing the credit reporting agencies to “clearly clearly and conspicuously disclose all material terms and conditions, including any fee and pricing information” for all their products within a year and a half.

What we think: The credit bureaus’ websites are covered with confusing bundles of credit reports, scores, and credit monitoring at various price points and with various free* trials —and none of them look much alike. Offering a standardized format (just like what happened to credit card terms a few years ago) would go a long way.

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7. Real scores that mean something

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What it does: The credit industry uses literally dozens of variations of “credit scoring models” to judge you, and there’s no way to know if the score you get is the same one any particular lender is using. This bill ensures you get “a current credit score using the formula most frequently used,” or a score that’s explicitly labeled as “educational” rather than factual.

What we think: You’re more likely to get a score that’s relevant to the loan you want this way. Even if you don’t, you’ll learn something. “Educational” scores have to list at least four negative and four positive factors affecting your score, then spell out what you can do to improve it.

8. Compare to your neighbors

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What it does: A three-digit number by itself doesn’t tell you much, so Waters wants to make sure you see the distribution of all consumers’ credit scores, “in the form of a bar graph containing a minimum of six bars that illustrates the percentage of consumers with credit scores or educational credit scores within the range of scores reflected in each bar.”

What we think: This basically forces the credit reporting agency to graph how much you suck compared to everyone else, but we guess context is a good thing.

9. Truth in labeling

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What it does: If you receive a score that isn’t what lenders actually use — often called an “educational score” — it’ll come with a big fat label “in boldface type of 18 point font or larger, and in a text box with boldface outer borders” explaining why lenders don’t really care about that score. Lenders will also be banned from calling educational credit scores simple “credit scores.”

What we think: The type-size specifics are a little overbearing, but we’ve never met a consumer excited about fine print. You need to know which scores actually matter, especially if you’re considering paying for one. Speaking of…

10. Finally, free credit scores

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What it does: Consumers can already get free credit reports, which credit scores are based on, once per year from each credit bureau. That’s done in one central place, AnnualCreditReport.com. Under this proposal, you’d also get a free annual credit score there. The bill would also cap the price of additional scores at $10 each – cheaper than any currently for sale.

What we think: There are a few banks that offer free credit scores, but it’s nowhere near universal. It should be. Consumer advocates have demanded that for years, and it makes sense: You shouldn’t have to pay (for a number representing your own data) to know what you’re going to have to pay (for your own credit).

It also means cheaper additional scores. Right now, the cheapest we can find on any of the credit bureau websites is $15. Of course, this justs mean the credit bureaus are going to find a new way to make money off us.

11. Fewer strings attached

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What it does: Go to the homepage of Experian or TransUnion right now, and you’ll see an offer to get your credit report and score for $1 — as part of a seven-day trial, and if you forget to cancel, you’ll be billed $18 to $20 a month for credit monitoring. Waters wants consumers off the hook unless they specifically opt in at the end of the trial period.

What we think: This is probably a punch right in the moneymaker for credit reporting agencies, but they kind of deserve it.

12. Setting up a one-stop shop

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What it does: Eliminates the run-around. The bill would force credit reporting agencies to have the people who communicate with consumers about disputes and errors be the ones to go into the database and fix them.

What we think: This should just make this a universal law applying to every industry, so you don’t get transferred to six different departments when you call the cable company with a billing dispute.

13. Minimizing the damage for questions

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What it does: In the world of credit, it can hurt to ask. Every application for credit shows up on your credit report, painting a picture of just how desperate you are. Problem is, you may just be shopping around at your leisure — and Waters wants it to look that way if you’re looking for a mortgage, car loan, or private student loan.

What we think: The way it works now, multiple loan applications in a 30-day window are grouped together so your credit only gets dinged once. Expanding that to a four-month window gives consumers more time and flexibility to make big financial decisions at the best rate they can.

14. Dig deeper into credit scoring alternatives

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What it does: Gives the CFPB a year to study “non-traditional data” — rent, utility, and phone payments, plus whatever else it wants — to see if any of it would be a smart addition to credit scoring. If you pay those bills on time, and most of us do, then your score (and credit-worthiness) goes up.

What we think: Both of the big credit scoring systems, FICO and VantageScore, are already looking for ways to beef up the credit profiles of people who don’t use banks and credit cards. This is a win all around.

So what happens now?

Waters’ bill was introduced in a rather dry Congressional hearing yesterday. (Yes, we listened to the whole thing via streaming audio. Best factoid: Sweden’s credit reports only track three years of history.) More hearings to come, and we’ll update you. Let the debate begin.

Debt.com assistant editor Jess Miller contributed to this report.

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