There Could Be Something Wrong With 42 Million Credit Reports
The Federal Trade Commission just released a report on the credit reporting industry that could spell trouble for tens of millions of consumers.
When the agency reviewed 1,000 consumers' credit reports, it found 25 percent of people had at least one error that could negatively impact their credit score. And once the errors were disputed, one in ten consumers saw their FICO scores increase, including five percent who had a 25-point bump.
This is a huge deal.
Two other major reports on credit reporting accuracy have offered completely different pictures in the past.
The first, conducted by the U.S. Public Interest Research Group in 2004, estimated close to 80 percent of reports are erroneous in some way. And in 2011, the Policy and Economic Research Council answered with a report that found less than 1 percent of consumers had potentially damning errors on their reports.
The FTC's report is the latest of five in a decade-long study of the credit reporting industry, and could be the best analysis available to date.
"These are eye-opening numbers for American consumers," Howard Shelanski, Director of the FTC's Bureau of Economics, said in a statement Monday. "The results of this first-of-its-kind study [making] it clear that consumers should check their credit reports regularly. If they don't, they are potentially putting their pocketbooks at risk."
Why Consumers Should Care
With the new findings, the FTC estimates between 10 and 21 percent of consumers have inaccurate credit reports –– that means between 20 million and 42 million consumers are toting around reports that make them look riskier to lenders than they actually are.
Slice and dice the numbers however you want (the Consumer Data Industry Association put a positive spin on things), but there's no getting around the fact that even seemingly small errors can pose problems for consumers.
"The problem is that if I have a credit score of 619, and I report an error and it goes up to 620, then that one point was meaningful," John Ulzheimer, CEO of Smartcredit.com, told BI. "Most lenders have these prefixed score tiers ... and if you're not at that score or higher, you don't get [competitive interest rates]."
And considering the fact that errors are likely to appear on reports pulled from all three major credit reporting agencies, the problem could be three-fold.
Boston University Prof. Michael Salinger, a former director of the Federal Trade Commission's Bureau of Economics, reached out to BI to say consumers should take the report as a call to action.
"Most people do not realize how many prices are affected by their credit scores. Even what you pay for car insurance depends on it," he said. " The FTC report seems to suggest that the rate of serious error is only about 5%, but that is enough to make it worth checking whether the information the credit reporting agencies have on you is correct."
Easy to Spot, Difficult to Fix
Finding the errors is the easy part. Anyone can check their credit report for free from all three credit bureaus at annualcreditreport.com.
It's getting a reporting agency to fix the issue that can be tricky, as we saw played out in this eye-opening report by CBS's Steve Kroft.
In the FTC study, the most common errors involved information furnished by credit lenders (13.8 percent) and debt collectors (7.5 percent). Even so, it's up to the consumer to file a dispute with their credit agency in order to get the problem fixed. Once you've gotten the CRA involved -- either Transunion, Equifax (EFX) or Experian (EXPN) -- it is under federal obligation to see that the issue is addressed. And if the error is repeated at all three agencies, you have to file disputes individually with each one.
The good news is that once these errors are disputed and corrected, consumers should see an immediate impact on their credit score. About 8 million credit report disputes are filed each year, which seems paltry considering the FTC's findings.
"Clearly, you want to have accuracy on a credit report," Ulzheimer said. "Even if it's a cosmetic error, like an incorrect address or your employment information is outdated ... consumers have a right to a correct credit report across the board."
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