Timeline
Early 20th Century: Credit reports begin existing in the U.S. as handwritten files stored locally.
Pre-1995: Local bank officers assess loan applicants manually by reviewing trade lines on a credit report, relying on human judgment. There are no scoring algorithms.
1988: John Mackey begins studying the credit system extensively.
1995: FICO scores are introduced into the mortgage industry. Initially, only conventional loans require them.
Post-1995 (Soon After): The FHA follows suit and begins requiring FICO scores, making credit scores a gatekeeper for nearly all home loans.
Present Day: The credit reporting system faces significant problems, including multiple FICO scoring models (from FICO 2 to FICO 10T), the continued use of outdated models despite the existence of more accurate ones (FICO 10 and 10T), a seven-year reporting period for derogatory accounts, paid collections remaining on reports and potentially lowering scores, credit bureaus not being required to verify accuracy unless disputed, and creditors not notifying consumers before reporting negative information.
Proposed Reforms (Recommendations by John Mackey):Standardize on one scoring system: FICO 10T.
Shorten the lifespan of derogatory trade lines to two years after the date of last activity.
Remove paid collections from credit reports immediately.
Require credit bureaus to verify the accuracy of information before it is sold or used.
Require credit bureaus to fund an independent nonprofit for public credit education.
Require creditors to notify consumers (via email, text, or phone) before reporting negative information.
Cast of Characters
John Mackey: A nationally recognized expert on credit, FICO scoring, and consumer financial protection. He has studied the credit system extensively since 1988 and is the source of the six key recommendations for reforming the system. He also conducts seminars to educate consumers on credit reports, debt collection, and scoring systems.
FICO (Fair Isaac Corporation): The company that developed FICO credit scores. Their scores were introduced to the mortgage industry in 1995 and later adopted by the FHA, making credit scores a dominant factor in loan approvals. They have developed multiple scoring models over time.
Credit Bureaus: Companies that collect and maintain consumer credit information and generate credit reports. They profit from selling consumer data but, according to the source, are not currently required to verify the accuracy of the data unless it is disputed by the consumer. Examples (though not explicitly named in the source) are companies like Equifax, Experian, and TransUnion, which are implied by the description of the nationalized system.
Creditors: Entities (like banks, lenders, etc.) that extend credit to consumers and report their payment behavior (both positive and negative) to credit bureaus. The source notes that most currently do not notify consumers before reporting negative information.
Consumers: Individuals who utilize credit and whose financial behavior is tracked and reported by credit bureaus. They are the primary group affected by the current credit reporting system and the target of the proposed reforms.
Debt Collectors: Entities that attempt to recover unpaid debts. The source states they use credit reporting as leverage and that paid collections negatively impact consumer credit scores.
Local Bank Officers: Individuals who, before the widespread adoption of credit scoring algorithms, manually assessed loan applicants based on their credit reports and human judgment.
Share this post