Implementation of tighter credit reporting standards has meant a steep drop in collection demerits and an average 11-point increase in credit scores, says a New York Fed study.
Tighter credit reporting standards for debts in collection have paid off for millions of consumers over the past year, the Federal Reserve Bank of New York said Tuesday.
The fraction of people with an account in collection on their credit report plunged below 10 percent since mid-2017, according to an analysis linked to the bank’s quarterly Household Debt and Credit report.
The change, a result of the tighter standards in the National Consumer Assistance Plan, resulted in an overall average improvement of 11 points in consumers’ credit scores from June 2017 to June 2018.
Some people benefited much more. Eighteen percent saw their credit scores go up more than 30 points.
Consumer debt up – including credit cards
Other results from the quarterly report found that consumer debt continued on its upward path. Total household debt was up $82 billion to $13.29 trillion in the second quarter.
“Aggregate household debt grew for the 16th consecutive quarter in the second quarter of 2018,” Wilbert van der Klaauw, senior vice president at the New York Fed, said in a news release. Overall delinquency rates were stable, he said, while new student loan delinquencies slowed.
As for credit cards, the report found:
- Total balances were up 4.8 percent over the year to $829 billion.
- The number of accounts was 469.6 million, up from 459.3 million.
- The average balance per account was $1,765, up from $1,707.
- Delinquencies of 90 days or more affected 7.88 percent of balances, up from 7.38 percent.
Improvement in credit scores is mixed
“Those who saw the largest boost to their scores were generally those with initially very low credit scores,” said a blog written by four New York Fed economists, Andrew Haughwout, Donghoon Lee, Joelle Scally and Wilbert van der Klaauw.
Another 20 percent saw rheir credit scores go down, probably because of other changes on their report. Few people with high scores saw an improvement.
The assistance plan, which was the result of a 2015 settlement between states and the big three credit bureaus, tightened reporting of medical debts, court filings, non-contract debts such as traffic tickets and other measures.
Studies had anticipated improvement in some people’s credit scores. The New York Fed analysis, which looks at a sample of Equifax credit reports, measured the impact of the changes using the three-digit Equifax Risk Score.
Few people with scores below 620 saw enough of an improvement to move out of the deep subprime tier.
“Given that their score remains deeply subprime even after the boost, it’s likely that the collections accounts were not the only thing holding down their score,” the economists wrote.