The Carr Report: Is a ‘bi-merge’ credit report in the best interest of the consumer?

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If you’re an avid reader of my column, you know I talk more about building your net worth than I talk about building your credit score. I think two things can be done at once. I believe if you focus on building your net worth, an indirect benefit is that you’re simultaneously building your credit score. Here’s why:  Building your net worth encourages you to purchase assets. Building your net worth encourages you to pay your bills on time. More importantly, building your net worth encourages you to pay your debts off as soon as humanly possible.

Thirty-five percent of your credit score is based on your payment history. Thirty percent of your credit score is based on your utilization rate. By paying your bills on time and paying them off as soon as possible — particularly your credit cards, you benefit by having a good payment history and a low utilization rate. The end result is a great credit score. When you focus squarely on building and maintaining your credit score, you run the risk of financing your lifestyle and not necessarily accumulating assets.  Those who focus squarely on building their credit score tend to end up with a credit score that’s higher than the balance in their savings account. That’s hustling backwards if you ask me.

Nonetheless, one thing is for certain: having a good-to-great credit score is of paramount importance. Your credit score is viewed by landlords, banks, insurance companies and some jobs. Cash is king but credit is power.

Understanding how important credit is to readers of my column and followers of my social media pages, I’ve decided to reach out to one of the big three credit bureaus—TransUnion. I wanted to get the inside scoop on topics of importance to them. This is one of many articles we’ll co-author.

From Tracie Anderson, Principal of Economic Inclusion for U.S. Markets and Consumer Interactive at TransUnion:

There are two major decisions pending before the federal government right now that could affect homebuyers. One could make it significantly easier for creditworthy borrowers to get credit, while the other could prevent access for lower to moderate income buyers. I’ll explain:

As one of the largest national consumer reporting agencies, we see every day how a person’s credit can materially impact financing to buy a home. Although there are several actions people can take to build credit, many of the things they do every day aren’t always counted.  Some quick examples: Common activities such as paying rent, utilities or phone bills are not always reported to credit bureaus like TransUnion. That means people may miss the opportunity to have this payment history included on their credit profile (and by extension, have it influence their credit scores). This missed opportunity can significantly limit the millions of Americans who have a “thin” credit file, or no credit at all. 

The Federal Housing Finance Administration (FHFA), which makes policy decisions about conventional mortgages (the vast majority of mortgages), is looking to fix that for homebuyers by moving to what we call an “alternative data” model. That means companies that provide credit scores in a home purchase — like FICO, and soon VantageScore as well — could count rent payments and the like for credit scoring on a home purchase. This advancement could be a great motivation to drive greater reporting of rent, utilities and phone bill payments to credit bureaus. 

That change won’t happen for a little while, but it’s a smart decision we’re excited to see move forward.

Now, here’s one other change that’s not as positive for homebuyers. When you purchase a home today, the lender typically pulls your credit report from each of the three major credit bureaus (including TransUnion). They call this a “tri-merge” report. It provides lenders with three distinct scores based on three distinct consumer credit reports, and it’s an easy way for a lender to get as much information as possible to build an accurate picture of a borrower’s financial position.

FHFA has proposed moving to a “bi-merge” requirement, requiring reports from only two of the three bureaus. That may sound like a small change, but if you bank at a small institution or don’t have perfect credit, it could be a big deal. For example, what happens to someone who banks with a small institution that doesn’t provide data to all three bureaus? Do they get left out if they want a mortgage from another financial institution that only pulls credit reports from the “wrong” bureaus?

Or what about someone who has a credit score that hovers around 620—an important threshold many lenders use to determine eligibility? Let’s say their three scores with each of the major bureaus are 630, 624 and 618. That buyer might be OK under the tri-merge model that uses all three scores. 

But if a bank pulled only the 624 and the 618 scores using the proposed “bi-merge” model and the lender uses the lower of the two scores to determine eligibility, that could lead to a higher interest rate or lock a buyer out altogether.

People should have every opportunity to put their best foot forward. That’s what the current model offers, and it’s a model we hope FHFA will ultimately decide to keep. In the meantime, anyone looking to buy a home should keep an eye on these two major changes under consideration.

Damon Carr here: There you have it straight from someone who works for one of the credit bureas. “Alternate Data” model: This sounds like a good thing to me. Using things like rent, utility bills, and phone bills to help build your credit profile. These bills represent bills of necessity. We all need a place to live. We all need basic utilities like light, gas, and water.  In the event money is tight, you’re more likely to pay these bills than you are to pay credit cards.

Bi-merge credit report: Lenders to pull credit reports from only two credit bureaus instead of three. I doubt if this change moves forward. If you’ve ever applied for a mortgage, you’d know mortgage lenders want to know everything there is to know about you. Nowadays, not only are mortgage companies pulling a tri-merge credit report to determine your credit worthiness, they’re also pulling a bankruptcy score to determine the likelihood you’d file bankruptcy. A tri-merge credit report not only helps a borrower by providing more credit scores, it also serves as insurance and assurance that lenders are approving loans with all pertinent information.

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