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Credit scores are often determined by factors like loans and credit cards, but monthly payments for essential services, like utilities, are typically excluded from credit reports unless they go to collections. This leaves out people who, by choice or necessity, don't use credit products.
Kamala Harris, the senator from California and one of the Democratic contenders for president, revealed a new plan during the Essence Festival to amend the Fair Credit Reporting Act to encompass a wider range of payment types. Her proposal has garnered both support and criticism. Here's what you should know:
The ultimate goal of the plan is to promote increased homeownership.
By including on-time payments for rent, cell phone bills, and utilities in credit reports, Harris argues that individuals with limited or no credit history will find it easier to access credit. According to 2015 data from the Consumer Financial Protection Bureau, 26 million people are considered "credit invisible," with no credit history, while 19 million more have insufficient credit history to generate a score.
Harris' credit score proposal is part of her broader effort to narrow the racial gap in homeownership. Less than half of Black and Latino households own homes, compared to about 73 percent of white households. Additionally, Black and Latino individuals are more likely to be credit invisible. The idea is that by incorporating more payment information into credit scoring, these historically underserved communities will gain better access to credit, which in turn, may increase their opportunities for securing mortgages.
The advantages and drawbacks of including more payment data
While Harris' proposal may seem beneficial at first glance, it's not without its flaws. For people with limited credit histories, managing regular bills can often be difficult. For example, if you didn't work your usual hours one month and are unable to pay both rent and the electric bill on time, you may end up paying a late fee, but still manage to catch up once you get your next paycheck.
If that payment history is reported to the credit bureaus, a late payment—despite being temporary—could affect your credit score. This could lead to anxiety for individuals who are aware that their credit could be impacted by these payments, and if they're already struggling financially, it may do more harm than good.
That being said, two groups of individuals could potentially see immediate benefits from these changes.
The first group includes students or individuals just beginning their careers. Young people are often advised to establish a credit history by getting a credit card. However, if not managed carefully, those early years of credit use can lead to long-term disadvantages. By focusing on timely payments for essential expenses like rent and utilities, young people may feel less pressured to obtain a credit card and avoid the temptation to overspend.
The second group that stands to gain are those who are simply opposed to using credit. For every two people who use their credit cards for everyday purchases to earn rewards before paying off the balance each month, there’s someone who prefers to use cash or debit by choice. Some people avoid credit due to past financial mistakes that forced them to rebuild their finances, while others simply prefer to live within their means without relying on credit.
Accessing credit remains a double-edged sword
If you're one of those trying to establish a credit history from scratch, your options have typically been limited to secured credit cards, credit builder loans, or store-specific credit cards. Having your rent payments included on your credit report often requires your landlord's approval, and some services that track this information charge a fee to renters.
Marketwatch reports that the Fair Isaac Corporation, creator of the FICO credit score, already has the capability to include rent payment data in credit scores. Additionally, they are working on UltraFICO, a new model that assesses your creditworthiness based on your checking account balance, transaction history, and frequency of overdrafts. This system is designed for individuals with irregular incomes or those trying to rebuild their credit.
However, the major credit bureaus—Experian, Equifax, and TransUnion—still lack the necessary data to include non-credit bills, such as cell phone, utility, and rent payments, in their score calculations, according to Marketwatch. This means that even if Harris' proposed changes are implemented, it will take some time for these payment systems to establish the infrastructure to send data to the credit bureaus. In the meantime, if you're working on building credit, you’ll have to rely on traditional methods.
