On February 11, 2013, the Federal Trade Commission (FTC) released a Report to Congress under the provisions of the Fair and Accurate Credit Transactions Act (FACT) concerning the accuracy of credit reporting agencies in the United States. The 370-page report details the FTC’s study methodology, statistical analysis and process. This was the 5th interim report on a national study of credit report accuracy.
There are three major credit reporting agencies (CRAs): Equifax, TransUnion and Experian. The CRAs collect information from various credit holders, including mortgage companies, revolving credit grantors such as Sears, and automobile financing companies. The CRAs also collect information from public records such as bankruptcy courts, liens, judgments, and civil suits. This information is then sold back to credit grantors upon inquiry into an individual’s credit reliability, usually with a credit score. Not all creditors voluntarily supply information to the credit bureaus: some travel, entertainment, gasoline card companies, local retailers, student loan lenders and credit unions are among this group of non-reporting creditors.
The executive summary of the FTC study reports that there were 1,001 participants in the study and 2,968 credit reports were reviewed for correctness. Overall, 262 participants (26%) identified at least one potentially material error on at least one of their credit reports. Consumers alleged inaccuracies and filed disputes for 572 of the 2,968 credit reports. Of the 572 disputes, 399 had a modification made by a CRA and 211 had a score change, with 62 reports increasing by more than 25 points; 129 increased by more than 10 points; 65 reports increased such that the participant moved to a lower risk classification for automobile loans, implying a lower interest rate.
The conclusion of the FTC study reports that “overall, the results of the study suggest that while a notable number of consumers may have inaccuracies on their credit reports … the impact of these errors on credit scores is generally modest … and often there is no change in the credit score of the report”. Opinion: Statisticians are probably a lot smarter than this old country boy, but I must note that the sampling for the FTC study (1,001 individuals and 2,968 credit reports) is only .0000043% of the U.S. adult population (234,648,106) according to the 2010 census. That does not seem like a large enough sampling to conclude that error rates for the CRAs are “generally modest”.
The Fair Credit Reporting Act (FCRA) is designed to help ensure that CRAs furnish correct and complete information to businesses to use when evaluating your application for credit. Your rights under the FCRA include:
- You have the right to receive a free copy of your credit report on a yearly basis and the report must contain all of the information available in your file at the time of your request.
- You have the right to know the name of anyone who received your credit report in the last year for most purposes and in the last two years for employment purposes. This information is listed under the title “Inquiries” on your credit report.
- Any company that denies your credit application must supply the name and address of the CRA they contacted, provided the denial was based on information provided by the CRA.
- You have the right to a free copy of your credit report when your credit application is denied because of information supplied by the CRA. Your request must be made within 60 days of receiving your denial notice.
- If you contest the completeness or accuracy of information in your report, you should file a dispute with both the CRA and with the company that furnished the information to the CRA. Both the CRA and the furnisher of the information are legally obligated to investigate your dispute.
- You have the right to add a summary explanation to your credit report if your dispute is not resolved to your satisfaction.
When you apply for credit – whether for a credit card, a car loan, or a mortgage – lenders want to know what risk they’d take by loaning money to you. FICO® (Fair Isaac Corporation) scores are the credit scores most lenders use to determine your credit risk. You have three FICO scores, one for each of the three CRAs. FICO® scores range from 300 (bad) to 850 (great). Each score is based on information the credit bureau keeps on file about you. As this information changes, your credit scores tend to change as well. Your 3 FICO® scores affect both how much and what loan terms (interest rate, etc.) lenders will offer you at any given time. Taking steps to improve your FICO® scores can help you qualify for better rates from lenders. The FICO® score is calculated from several different pieces of credit data in your credit report. This data is grouped into five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and types of credit used (10%).
Coincidentally, CBS’s 60 Minutes broadcast a segment on the FTC report on February 10, 2013 in advance of the report’s release and painted a very bleak picture of the report results. 60 Minutes estimated that based on the FTC study, approximately 40 million individuals have errors on their credit report and approximately 20 million have significant errors. The broadcast provided several individual cases wherein the credit reporting errors have significantly affected the individual’s professional and personal ability to qualify for the best available financing opportunities, and even their ability to obtain and maintain a government security clearance. In one example, a woman had errors on her credit report and was denied the ability to refinance her home with the recent, very low interest rates being offered by mortgage companies across the U.S. She ultimately filed a lawsuit in Federal court to have her credit report corrected. The overall point of the broadcast was summed up in one question – In what industry is a 20% error rate acceptable? 60 Minutes reported that last year, only 44 million people obtained a copy of their individual credit report.
For those of you who hold a government security clearance or hope to get one, credit issues are the number one reason clearances are denied or revoked. Normally, when investigators obtain a credit report that shows significant derogatory items, the applicant undergoes a personal interview and is given the opportunity to provide information or documentation showing that the delinquencies are resolved or there are errors on the credit report. When the case file gets to the adjudication stage, adjudicators weigh all available information and have the option to request additional information from the applicant.
In summary, your credit reports are your personal and professional business. It is incumbent upon each of us to monitor our credit report status and history and to make efforts to correct errors we discover. It is our right to obtain a copy of our individual credit report once each year for free (annualcreditreport.com). Your FICO® score is usually not provided with your free annual report and the CRA sites often provide an advertisement that they will provide the score for a fee. Each of the CRAs have published procedures for petitioning for correction of erroneous entries contained on their respective report. I highly encourage everyone to make use of this process and remain diligent to correct mistakes. As a personal example, a co-worker (ABC Junior) who applied for a security clearance discovered that his credit report contained in excess of $10,000 in delinquent medical debts belonging to his father (ABC Senior). It took ABC Junior about one year to get all of the erroneous entries removed from his report. Although this situation did not result in his clearance denial, it did cause additional time for investigative efforts and adjudication of his case.
William R. Loveridge is a Facility Security Officer, a security consultant, a retired DoD personnel security adjudicator and a retired US Army Reserve Warrant Officer.