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How your credit report can help you—or hurt you

Errors are common, and they can wreak havoc on your finances

Published: November 2014

In a data-driven world, your credit record is your reputation, and false information can have deep repercussions. Bad credit can stop a loan cold. A landlord can refuse you a lease. An insurer can raise your premium. A prospective employer can turn you away.

Given how much your credit report can affect your day-to-day life, a recent Consumer Reports nationally representative survey offers some disturbing news regarding Americans’ attitudes toward these records. Only 53 percent of the 3,000 respondents said they had ever received their credit reports from one or more of the “Big Three” credit-reporting agencies or credit bureaus: Equifax, Experian, and TransUnion.

Also alarming: Of those who did check their reports, 20 percent found errors that could negatively affect their scores, including noncollectible old debt that was still listed, incorrect account information (payment history or credit limit, for example), accounts that weren’t theirs, and information about the wrong people. A 2013 Federal Trade Commission study of credit reports had similar findings. In it, 13 percent of 1,001 participants had errors, and 5 percent of the participants had errors serious enough to put them in a lower credit tier, which means they could be denied favorable interest rates and other opportunities.

What goes into your score

Your credit report details your credit history, and your credit score is a numerical expression of those details. That three-digit number—FICO, the most widely used score, goes from 300 to 850—is part of what lenders and other potential creditors use to judge you. By one estimate, if you make a credit-card payment 30 days late, your FICO score could drop by as much as 100 points. A drop from a high score of 780 to an OK score of 680 could add an additional $828 per year to a $300,000, 30-year fixed mortgage, or $24,859 over the loan’s life, based on recent interest rates. 

Errors can prevent you from getting credit altogether. Mike DiPaolo, 84, of Dunwoody, Ga., discovered that was the case when an inaccuracy supplied by a lender ended up on his credit reports. A creditor canceled his account and another reduced his line of credit. He had to sue the lender and the credit bureaus to clear his name and his record. “It took over two years to get this resolved,” DiPaolo recalls.

Identity mix-ups—called mixed files—are among the most difficult mistakes to fix. Each time you or a potential creditor want information, credit bureaus create new credit reports. They match identifiers supplied in the request with information from “furnishers” (credit-card, mortgage, car-finance, and other companies you’ve done business with). An error could appear because a credit-reporting agency or furnisher miscoded something or, much worse, because someone stole your Social Security number and ran up debts.

But errors are also a function of choices that credit-reporting agencies make. Software programmed to match, say, only part of a person’s Social Security number or city of residence can provide more data to businesses that buy credit reports on millions of American consumers. But that looser screening might then mix up two people with the same name, scuttling a loan application.

“They’d rather give more information than less, but sometimes the extra information is not about you,” says John Soumilas, an attorney at Francis & Mailman, a consumer-law firm in Philadelphia.

Setting the record straight

The path to resolving credit disputes isn’t always smooth. Two-thirds of our survey respondents who found errors attempted to fix them. More than half of them told us they ran into challenges, including being ignored, rejected, or subjected to outright lies.

Leonard Bennett, a consumer-law attorney in Newport News, Va., says that he’s not surprised. “Often, the agencies just have their computers verify that previously reported information is still being reported,” he says. “No humans are involved.”

Stuart K. Pratt, president and CEO of the Consumer Data Industry Association, a trade group, says that member companies have systems to ensure that disputes entered into their databases are properly described and that those disputes get quickly into the hands of lenders, where the discrepancies may have originated.

“Our systems also require lenders to review consumer-submitted credit-report disputes” so that they get proper attention, Pratt maintains.

Last May Mississippi became the first state to sue a credit bureau for alleged violations of state and federal law. Among the charges—alleged by the state’s attorney general, Jim Hood—are that Experian mixed the identities of consumers, reported as late or delinquent accounts that were paid on time or settled in full, failed to update its records of liens or judgments that were removed or resolved, and reported living people as dead.

Experian’s response is that the lawsuit is unsupported by facts and evidence, and that it will vigorously defend itself.

Consumers are also taking action on their own. In July 2013 Julie Miller, a 58-year-old nurse in Marion County, Ore., won a record verdict of $18.4 million in punitive damages against Equifax. In her suit, Miller contended that the company ignored her pleas to correct a mixed-file problem that corrupted her credit file with numerous collections accounts belonging to someone else. (Last January punitive and compensatory damages were reduced to $1.8 million.)

“She didn’t want to sue anybody,” says Michael Baxter, one of the attorneys who represented Miller. “She just wanted to get her credit clean.”

Change is coming

To expedite corrections on credit reports, the Consumer Financial Protec­tion Bureau has successfully pushed for changes to the computer system that shares consumer dispute information. And this year the agency is expected to issue rules that better outline credit-reporting agencies’ and furnishers’ responsibilities in correcting credit-report errors.

Consumers Union, the advocacy arm of Consumer Reports, supports those efforts, as well as legislation to require credit-reporting agencies to provide free “real” credit scores that lenders use (as opposed to “educational” scores) with the free annual credit reports that consumers already are entitled to get through AnnualCreditReport.com.

Other useful legislation that might be reintroduced in the Senate would allow courts to stop credit-reporting agencies from giving inaccurate information and would require creditors to review and consider all documentation provided by the consumer.

Other pending bills could help credit scores by requiring the removal of paid or settled medical debt from credit reports. New versions of VantageScore and the FICO score, FICO Score 9, don’t factor in that type of debt.

Editor's Note: This article also appeared in the January 2015 issue of Consumer Reports magazine.
   

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