CHAPTER 2 THE "IMPERFECT" CREDIT REPORTING SYSTEM AND THE "LESS THAN PERFECT" CREDIT SCORING SOFTWARE ANALYZING IT We've discussed the tremendous impact a credit score can have on a person's life, and many people today are feeling the repercussions of prior poor credit performance. While negative marks on a credit report may seem a fair punishment for bad financial choices, inexperience, or just plain neglect, sometimes financial setbacks are beyond our control. People do learn from their mistakes and deserve a second chance to show that they have become creditworthy. Furthermore, as you'll see, all too frequently the negative marks on a credit report are due to errors caused by information furnishers or the credit bureaus themselves. These inaccurate derogatories hurt the consumer all the same-and there's certainly nothing fair about that. In this chapter, we'll look at the some of the flaws in the credit reporting and credit scoring systems and how this becomes unfair to consumers, including the types of errors that can occur and how the responsible parties fail to correct them. We'll also look at the tools consumers do have for fighting back, beginning with the Fair Credit Reporting Act. FAIR CREDIT REPORTING ACT (FCRA) Dealing with billions of bits of data for hundreds of millions of consumers, the credit reporting system is highly susceptible to errors. These errors, of course, can be either to the consumers' benefit or detriment, raising or lowering the credit score from where it actually "should" be. With the increasing power credit scores have over consumers' lives, it's the mistakes that impact us negatively that we're most concerned about. As such, over the decades of credit reporting, there has been a huge public demand for truth and accuracy in credit reporting and scoring. In 1970 the outcry from the public must have outweighed the special interest money the politicians were getting from the banking lobby, because Congress responded by enacting the Fair Credit Reporting Act (FCRA) as a means of protecting consumers in their dealings with the credit bureaus. Among the FCRA protections for consumers are limitations as to who can request a consumer's credit report and how long negative information can stay on a report. The FCRA also requires credit bureaus to follow certain procedures to ensure that credit reports are as accurate as possible, even though many of these requirements are ignored by the bureaus or do not rise to the level of detail the law was meant to require. Because errors can occur in many different ways, perhaps the most important protection provided by the FCRA is that it grants consumers the right to dispute the errors they find in their credit reports. Under the FCRA, both the credit bureaus and the party furnishing the information (creditors, lenders, collection agencies, and so forth) are required to investigate consumers' disputes and correct or eliminate data that is found to be inaccurate, unverifiable, obsolete, or incomplete. Before we get into how the disputing process works, let's look at some of the more common errors that you are likely to find in your credit report. ERRORS HARMING CONSUMERS Despite the importance of accuracy in credit reporting and the protections set forth by the FCRA, errors in credit reports are abound, causing great harm to consumers: 1) through the denial of credit, insurance, or employment; 2) in the granting of credit or insurance but at much higher rates; and, perhaps most detrimental of all, 3) in the tremendous time, energy, and opportunity that is lost by consumers and in the stress they incur in trying to correct inaccuracies with the credit bureaus and information providers, often with poor results. In fact, it is estimated that serious errors or inaccuracies occur on as many as 25% of credit reports. This would mean that millions upon millions of Americans are subject to the denial of credit and other negative consequences that occur because of inaccurate information. Though there are many types of errors that can plague a credit report, we will focus on a few of the most common and flagrant ones: the mixing or "merging" of multiple consumers' credit files by the credit bureaus the false credit history created by identity theft, including the creation of new credit accounts and negative payment history on those accounts, plus increased debt ratio overall inaccurate information reported to the credit bureaus by creditors, such as a debt being assigned to the wrong consumer or repayment histories being reported inaccurately illegal inquiries failure to report credit limits debt collection abuses, such as duplicate accounts and "re-aging" of accounts by updating the date of first delinquency with the original creditor Mixed or Merged Files When a credit bureau includes the credit information of one consumer in the file of another consumer, one or both consumers' credit histories report inaccurately. This occurrence is known as a "mixed" or "merged" file, and it most commonly occurs when there are similarities in identifying information between two consumers, such as in their names or Social Security numbers. This type of error occurs in large part because of the over-inclusive criteria credit bureaus use when pulling together data to compile a credit report. For example, the credit bureaus will include account information in a consumer's file when the Social Security numbers do not match exactly but other information matches. Thus, they have been known to merge files when the consumers' names are similar and they share seven of nine digits in their Social Security numbers. It's important to realize, too, that the credit bureaus' main goal is to please their paying customers-meaning creditors, not consumers. Thus it makes sense that they have designed the credit reporting system to include more potentially derogatory information on a consumer than less, even if all of the information cannot be matched with absolute certainty to that consumer. To the credit bureaus, this is justification enough to allow mixed files. In most cases, only lenders benefit from this practice. Indeed, because of today's increased use by lenders of "risk-based pricing," a credit score that is lowered due to errors may even result in the lender making more profit, because the consumer will be charged a higher rate for the credit they receive. Identity Theft Often dubbed the "fastest growing crime" in America, identity theft adversely affects millions of consumers-and their credit scores-every year. A hybrid of the mixed file problem described above, it has become a serious source of inaccuracies in the credit reporting system. Even though the identity thief is to blame here, part of the responsibility also falls on the shoulders of the credit bureaus and data furnishers. Their over-inclusive criteria mentioned above often allows account information to be included even when the identifiers don't perfectly match, such as when an identity thief uses the victim's last name and Social Security number, but not the first name or address. Errors from Information Furnishers Creditors and other data furnishers also introduce many errors into the credit reporting system. These errors usually fall into two types: 1) the inaccurate reporting of payment history, current payment status, or account balance, and 2) the attribution of a credit account to the wrong consumer. The first type of mistake can occur easily through human error: clerks making mistakes in data entry or applying payments to the wrong account. The second type of error, where the account's "ownership" is in dispute, can occur when a spouse or other authorized user who should not be is being reported as liable for the debt. Other times, the consumer may have been the victim of identity theft. Information being reported by a data furnisher to the credit bureaus automatically appears in consumers' credit reports. In fact, the credit bureaus are notorious for blindly accepting without any quality review the information they get from data furnishers, even if that information blatantly contradicts other information found in a consumer's credit file. Illegal Inquiries Did you know that it is illegal to access another's credit report without their consent? The FCRA clearly states that a consumer's credit report can be accessed only for the purposes of offering credit, insurance, housing, or employment, with the only exception being current creditors of the consumer that want to pull an updated report on the consumer to see how their credit stands. This works to ensure...
