On a Saturday morning earlier this month, Brooke Evans was participating in a conference via Zoom /zigman2/quotes/211319643/composite ZM +4.45% when a distraction popped up. An email from Credit Karma, a company consumers can use to access their credit score, notified her that a remark had been added to her credit report via Equifax /zigman2/quotes/208789454/composite EFX -0.07% , the credit reporting agency.
Curious and diligent about monitoring her credit score, Evans started investigating. She learned that her credit score had dropped six points and the reason was tied to her student loans. Evans, who says she remained current on her $45,000 in student debt through a repayment plan that allows borrowers to make payments based on how much income they earn, was shocked to see her credit score had changed. “I didn’t know what the heck I had done,” she said.
‘It’s another pressure, it’s another thing to worry about, it’s another battle to have to fight. It’s too much.’
Brooke Evans, whose credit score dropped after payments were paused under the CARES Act
To find out her credit score inexplicably dropped in the middle of a pandemic that’s already creating so much uncertainty, was unsettling, Evans said. The 28-year-old, who says she is currently sheltering in a temporary living arrangement, worries that any ding to her credit score could impact her search for affordable housing.
“It’s another pressure, it’s another thing to worry about, it’s another battle to have to fight,” she said. “It’s too much.”
Eventually, after sending messages on Twitter /zigman2/quotes/203180645/composite TWTR +1.01% tagging the companies involved and eventually getting on the phone with her student-loan servicer, Great Lakes, Evans learned that her credit score decline was tied to the CARES Act, the $2.2-trillion stimulus bill that allowed student-loan borrowers to pause payments.
She appears to be one of up to roughly five million borrowers whose score was dinged, despite instructions from Congress that the pause on student-loan payments shouldn’t affect borrowers’ credit scores.
The situation highlights the challenges consumers are facing as they navigate pandemic-era relief programs. It also underscores the complex web of companies the hold sway over Americans’ personal finances, companies that control how consumers are judged through a process that’s poorly understood by the average person
A credit score is a crucial metric that lenders use to assess borrowers’ eligibility for auto, home and other loans — and the price they pay for those loans — as well as renting apartments and other major purchases. In some cases, it’s even used by employers to evaluate a potential new hire. But it’s based on an algorithm that’s often opaque to consumers and it relies on lenders reporting information to credit bureaus accurately.
“The faith in these credit reports being accurate is just enormous,” said Seth Frotman, the executive director of the nonprofit advocacy group Student Borrower Protection Center, which filed a class-action lawsuit against Great Lakes, Equifax, TransUnion /zigman2/quotes/209192458/composite TRU +0.13% , Experian /zigman2/quotes/208623784/composite EXPGY -0.99% and VantageScore accusing the companies of illegally damaging borrowers’ credit scores. “When the companies responsible fail, and in this case fail miserably, it could impact millions of borrowers’ lives.”
One of the lead plaintiffs in the suit, Cody Hounanian, who is also the program director for Student Debt Crisis, another borrower advocacy group, saw his score drop by up to 33 points while searching for a home, the lawsuit alleges. Borrowers on social media have also complained of double digit drops in their scores.
‘The faith in these credit reports being accurate is just enormous. When the companies responsible fail, and in this case fail miserably, it could impact millions of borrowers’ lives.’
Seth Frotman, the executive director of the nonprofit advocacy group Student Borrower Protection Center
A consumer’s credit score is calculated based on information like whether payments are made on time and other factors that lenders report in a standardized way, typically monthly, to credit agencies like Experian, TransUnion and Equifax. Companies like FICO /zigman2/quotes/200175312/composite FICO +0.72% and VantageScore suck that information into an algorithm to calculate a score that is supposed to predict how likely a consumer is to go delinquent in the relatively near future. A credit score is usually based on data from one of the credit bureaus.
It’s a system that’s now used widely beyond its original intentions and that consumers have almost no way of opting out of if they want to use credit, said Dalié Jiménez, a professor at University of California, Irvine law school.
“Your data is not your data in this sense,” she said. “They’re sharing it with a third party and then a lot of people have access to it, lots of things can happen as a result and you have no control over how that goes. Because it’s so basic and it’s been around for so long and everybody just accepts it, people don’t think about it.”
A complex web of companies play a role in each person’s credit score
The back and forth between the companies and agencies involved in this particular situation illustrates the challenges consumers face sorting through whether and how this important metric was affected.
Thanks to borrower inquiries, Great Lakes, which together with its parent company Nelnet /zigman2/quotes/208702387/composite NNI +1.46% services more than 40% of the government’s student-loan portfolio, discovered on May 11 that the company was reporting information about the forbearance period in the CARES Act in a way that could have negative consequences for borrowers, according to Ben Kiser, a spokesman for the company.
The U.S. Department of Education had instructed servicers to report the paused payments to the credit agencies as if borrowers owed a $0 monthly payment, that they had paid it, and that they were current on their loans. Instead, Great Lakes reported those $0 monthly payments as deferred, Kiser said.
In addition to working to adjust the reporting immediately, the company also encouraged borrowers to reach out to the credit reporting agencies directly, instead of using a third-party service, because Great Lakes believes that the error didn’t impact borrowers’ scores at those agencies, according to Kiser. Typically Equifax, Experian and TransUnion are only required to provide customers with free credit reports once a year, which is why consumers often rely on free credit reporting sites like Credit Karma. During the pandemic, consumers can access their credit reports directly from the credit bureaus weekly for free.
The Department of Education offered guidance similar to Great Lakes’ on a website : “If you noticed a negative change in your credit information displayed by a third-party credit service, such as Credit Karma, you should verify your credit score with Equifax, Experian, or TransUnion.”
But Emily Donohue, a spokeswoman for Credit Karma said the company simply publishes the credit information they receive from VantageScore, a credit score algorithm that was created by the three credit reporting agencies.
“Credit Karma has no role in aggregating from the financial institutions the data VantageScore uses, nor does it own or contribute to the VantageScore 3.0 model,” Donohue wrote in an email. “Rather, Credit Karma is merely a conduit by which a member’s VantageScore is passed from the bureaus to our members (consumers).”
VantageScore noted in a blog post earlier this month that some consumers saw their credit scores change as “as a result of the unprecedented widespread use of forbearance and deferment codes for consumer loans that have received payment relief by lenders.” The company also noted in the blog post that it was adjusting its model to minimize any damage from these deferment or forbearance codes.
FICO, the other leading credit score provider, does not take deferments into account in its algorithm, so Great Lakes’ deferment coding didn’t affect borrowers’ FICO scores.
To sum up: Great Lakes acknowledged its error, but believes that it didn’t affect borrowers’ scores held by the individual credit reporting agencies. At the same time, the third-party company where borrowers like Evans noticed their scores had dropped — Credit Karma — says it pulls customers’ scores directly from VantageScore, a credit score algorithm that uses data from the three credit reporting agencies and that is used by some lenders to assess creditworthiness.
The issue is on its way to being resolved, Kiser said, because Great Lakes provided updated credit files to all four credit bureaus on May 15, and, as of Thursday three out of the four credit bureaus had already processed the files, and the fourth planned to do so shortly.
Equifax, Experian and Transunion did not respond to requests for comment. The Consumer Data Industry Association, a group that represents all three agencies, “has worked closely with the three bureaus to support data furnishers’ consumer credit reporting activities during the pandemic in accordance with the CARES Act,” said president and CEO Francis Creighton. “The bureaus continue to work with servicers to ensure that student loan and other accommodations are being appropriately reflected on consumer credit reports and can be updated if necessary.”
How will skipping payments ultimately affect borrowers’ credit scores?
But the experience highlights the challenges involved in protecting borrowers in our current student-loan system and also raises questions about how consumers’ creditworthiness will be impacted by this period, said Persis Yu, the director of the Student Loan Borrower Assistance Project at the National Consumer Law Center.
“One thing that has come out of this is that we don’t actually know what the impact of all of these different updates are on credit reporting,” Yu said. “The scoring models are a black box.”
For Evans, these past few weeks have left her with the nagging feeling that she has little control over a marker that so many companies rely on to assess her financial health, despite staying on top of all of her loan payments. In addition to this most recent experience, Evans said she was a victim of the Equifax hack in 2017, and her score is still recovering from when one of her credit cards was closed unexpectedly by the lender for lack of use.
“It feels like there’s no integrity in the process of credit scoring,” she said. “I don’t think it accurately represents any one’s decision making or priorities or responsibility.”