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A major overhaul in credit reporting could improve your credit score

The country’s biggest credit bureaus are making changes that could help millions of Americans qualify for better interest rates on student loans, mortgages and auto financing, saving them thousands of dollars.

On Monday, Experian, Equifax and TransUnion said they will be more diligent in resolving disputes over errors and they will wait longer before including unpaid medical debt  in credit reports. The changes, which will take effect in the next few months, follow months of negotiations between the credit bureaus and New York Attorney General Eric Schneiderman, who has been investigating consumer complaints against the companies for the past year.

“The nation’s largest reporting agencies have a responsibility to investigate and correct errors on consumers’ credit reports. This agreement will reform the entire industry and provide vital protections for millions of consumers across the country,” Schneiderman said in a statement.

Credit bureaus have come under greater scrutiny as government authorities and consumer advocates question the accuracy of their reporting. The bureaus act as middlemen that collect data from credit card companies, lenders and collection agencies on consumer debt, late payments, foreclosure, bankruptcies and balances. All of that information is then compiled in a report that is used to calculate credit scores.

The scores, which are based on a 300- to 850-point scale, aim to measure the likelihood that a person will repay a debt based on his or her record. They affect people’s ability to get a mortgage, car loan, credit card or sometimes even a job.

Given the widespread use of the scores, even small variations can have huge consequences, including higher interest rates on loans or flat-out denial of credit. Researchers at the Federal Trade Commission found that one in five people had an error in their credit report. Advocates have complained that credit bureaus give consumers the run around when they contest items on their reports.

Now, the companies will have to train employees to review all documentation submitted by consumers for all disputes, including those involving fraud or identity theft. Even if a creditor says its information is correct, the bureaus must still look into the complaint and resolve the dispute. The companies also have to provide consumers with a free credit report to verify that the agency has corrected the disputed information.

In another major move, the big three bureaus will institute a 180-day waiting period before including medical debt in a credit report. The waiting period will provide extra time for resolution of delinquencies that result from insurance delays or disputes. And once an insurer pays the bills, the bureaus will remove all medical debts from a consumer’s credit report, rather than keep the black mark on their for up to seven years as with all other debt.

There are often lapses between when people are billed and insurers pay up, which could result in an account being turned over to a collection agency. Medical debt accounts for more than half of all unpaid debt in collection, and 43 million Americans have past-due medical debt on their credit reports, according to the Consumer Financial Protection Bureau.

The agency conducted a study last spring that found that people saddled with medical debt had otherwise good track records of paying their bills on time, leading the bureau to conclude that unpaid medical bills was not a clear indicator of credit risk. Shortly after the report, Fair Isaac Corp. (FICO), creator of the most widely used credit score, said it would no longer factor in past-due payments that have already been made or give medical debt as much weight in its calculations.

All of the new changes in credit reporting represent a fundamental shift in the way companies manage critical information about the way people pay their bills. It’s been a decade since any substantial changes have been made to the Fair Credit Reporting Act, the 45-year-old consumer protection law that governs credit reporting. The last major amendment to the law gave consumers the right to one free annual credit report and directed mortgage lenders to provide credit scores to borrowers, among other things. Little has changed since then.

Industry groups say credit agencies have taken steps in recent years to make reporting more transparent and consumer friendly, including allowing consumers to upload documents to dispute errors on their reports.

“We are always looking for ways to improve our procedures,” said Stuart Pratt, president and chief executive of the Consumer Data Industry Association, a trade group that spoke on behalf of the three agencies. “We have never hesitated to go beyond the letter of the law to voluntarily improve the existing credit reporting environment.”