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The Lies Lenders Tell
Now that you have the right to a free peek into your credit file, you might be surprised by what everyone's saying about you. It's easier than ever to set the record straight. But you might not want to after all. Some of those boo-boos may boost your credit score.
By Dayana Yochim (TMF School)
December 6, 2004
Last week under the Fair and Accurate Credit Transactions Act (FACTA), one quarter of the nation had the opportunity to take a free peek into their credit file. So that's what that keening yowl coming from the West Coast was all about.
If the consumer studies are right, then nearly 80% of the records pulled contained errors. According to a 2004 survey by the Public Interest Research Group (PIRG), one in four of those blunders was bad enough to make a lender do a double take and demur from a business relationship. Credit industry studies show that the incidents of inaccuracies are much lower.
Whether PIRG's figures represent the norm or whether the industry's own horn-tooting is in key really doesn't matter. What's most important is that your credit file contents accurately represent your history. The funny thing is, some of those boo-boos may actually be boosting your score.
Why bother?
If it seems like practically everyone's sizing you up by your credit history, that's because, well, they are. Your credit report is no longer some dusty old document occasionally updated by your hometown banker or your longtime car loan guy. According to the Federal Trade Commission, over the course of a typical workday about 2 million credit reports are requested by companies going about their business.
Everyone from your insurer to a potential employer consults your credit file. One Minnesota groom-to-be caught his mother-in-law-to-be illegally rifling through his private credit stuff. Lenders, landlords, collection agencies, credit card companies, cable TV companies, cell phone providers, ISPs -- seems like everyone wants to know your secrets before they'll commit. It's only a matter of time before we see ads in the personals claiming: "SWM w/FICO 773, loves cats, opera, long walks on the beach, low interest rates...."
Whether you agree or not, companies have found correlations between how you handle your finances and how good of a customer/driver/employee/bill payer you'll be to them. Defaulted on a few loans? You'll pay for your slacker ways when it comes time to insure your car. Frequently hopping from one credit card to the next? That might be telling about your inability to commit -- not a good sign to an employer who prizes allegiance above all else.
If a business can prove it has a "permissible purpose" for checking your credit file, it will. Don't expect the credit reporting agencies to discourage it, either. The admission charge is their bread and butter business. Take a moment to be outraged that trade of your private information is padding executive retirement packages. But don't furrow that brow too long. It's in each credit reporting agency's best interest to be the source of the most accurate information. Those who deliver consistently stellar goods will become the industry gold standard -- the Kleenex brand to competitors' quickly disintegrating tissue.
Thanks to FACT Act, credit-reporting agencies now have to play "nice" with one another. The legislation requires that they share more information than ever -- such as alerting competitors when a consumer reports credit fraud -- and that what they share must adhere to a similar format. Information is flying fast, and some smaller niche reporting companies are still in the dark ages of paper and email data collection. That's no small feat: More than 100,000 entities funnel information to the credit reporting agencies, adding 2 billion pieces of information each month.
Oh, and guess what? It's up to you to double-check everyone's work.
Legislators are aware of the consumer's burden in cleaning up credit problems, and they included a number of provisions in FACT Act to help individuals right any wrongs. Perhaps the biggest change is that if you spot an error, you can now take your case directly to the reporting entity (credit card company, utility bill department) instead of relying on a middle man (the credit reporting bureaus) to handle your case.
So what blunders did West Coast consumers find in their records last week?
Little flub-ups
The majority of credit reporting errors -- even those reported by the most damning accuracy studies -- are minor and have little or no bearing on your standing in the banking world. Things like name misspellings, wrong apartment numbers, and slightly off employment history can usually be corrected with one phone call directly to the credit-reporting agency.
Most of what's wrong is missing information. There are several reasons why your true borrowing history may not be reflected in your file.
Sins of omission: Some smaller-store charge cards may not report credit activity. So your 10-year Puppy Palace Charge (where you earn Pet Points) won't even appear under your active accounts. Many lenders fail to report payment information.
You might not want to keep mum about invisible accounts and missing payment data. The lack of information can make you look lame to lenders. If most of your accounts have no payment reporting information and you are a stickler about on-time payments, a potential creditor can't tell whether you're a good or a bad bet.
If your credit file is thin, call your nonreporting lenders and ask them to communicate more information about your account, if possible. And remember, just because information does not appear on one of your credit reports doesn't mean that it's not included on another. Reporting companies aren't required to share information with all three major credit bureaus -- or any of them, for that matter.
Hibernating accounts: If you fail to use an open account for a while it may go into a deep sleep in your credit file. (Remember that Discover card you opened to get those airline miles you needed for your Hawaii trip?) A lender who has no payment information to report will simply stop reporting to the credit bureaus. (The timeframe varies from lender to lender.)
Don't assume that all's well on an old, unused account. Check up on it occasionally -- make sure you don't owe some annual fee or that the card is being used fraudulently and the bills sent elsewhere. If you truly doubt you'll ever use the card and it's not one of your oldest accounts, consider closing it. But beware of canceling credit cards willy-nilly. Doing so may actually hurt your FICO score. (Here's more on which cards to fold and which ones to hold.)
Keeping secrets from competitors: A surprising number of lenders choose to withhold reporting consumer credit limits. Keeping this information out of your file is not necessarily an innocent oversight. Without that key piece of data, competitors are less likely to poach clients by floating pre-approved offers your way. On the other hand, if most of your credit or charge cards have very low limits and those limits are not reported, you may actually look better in the eyes of a potential lender.
If you want your lender to report your limits, call and ask. Sometimes it is company policy not to report, but at least you can try.
Fortuitous boo-boos: Not every inaccuracy has a negative effect on your score. Send a thank-you note to your Mastercard if it missed reporting a late payment or two. Is some business claiming you've been a customer for longer than you actually have been? Has a past creditor forgotten to mention to the credit bureaus that you're no longer a customer? Such mistakes can actually improve your credit standing by overstating how good of a borrower you are. You can keep mum and pretend you didn't see their errors, but don't be surprised when a company finally sets your record straight.
Cut out the middle man
Despite the new legislation, the mandated consumer credit report freebies, the opening lines of communication between reporting agencies, and the lovely winter air, there's still one big hurdle that remains firmly entrenched in the system: It is nearly impossible for Equifax, TransUnion, or Experian to distinguish between accurate and inaccurate data provided by a reporting company.
This is what you might call "a big bummer." For example, let's say Visa reports that you paid them late a few months ago. Under the old model you'd first tell the credit-reporting agency that Visa is wrong -- that you know you sent your check in on time. Under the old and new laws the credit bureau must investigate your claim within 30 days. To do so it turns to Visa and asks them to verify what it says about you. The computers over at Visa show that, yes, indeed, there's a late payment mark on your record. The credit reporting agency informs you that the late payment has been verified and that it will continue to mar your otherwise perfect record. Case closed. End of story.
The problem is that you really didn't miss the due date. They've got the wrong guy. It's not like you can simply ring up Gwen from Visa's accounts receivables and get Charlie from Credit Reporting Agency on the line for a three-way conference call. Visa's records show that you paid late. The credit reporting agency has no information saying otherwise -- and, no, all your whining does not count. It simply takes that black-and-white notation for face value and closes your dispute file.
Under the amendment to the Fair Credit Reporting Act you have the right to face your accuser -- in this case you can and should go directly to Visa to dispute its late-payment claim. (Here's a sample "Dear Lender" letter.) Your innocence can be proved with a canceled check, the record of an online bill payment or simply pointing out that it was someone with a similar name or account number who forgot to put his check in the mail on time.
When Visa has its "oopsy daisy!" moment, it is required to right its wrong with every credit reporting entity to which it reported the original misinformation, not just the one with which you first discovered the boo-boo. This is important (and why the editors italicized it). Unfortunately the onus is still on the consumer to make lenders tell the truth. But by getting to the root of the original problem -- and doing so just once, with the reporting company required to notify all involved parties -- errors will be corrected more efficiently.
Times when it makes sense to bypass the credit reporting agencies and go directly to the reporting entity include:
Disputing accounts opened in your name without your knowledge.
Removing public records that were expunged or expired.
Striking closed accounts that have no negative information tied to them.
Removing hard-credit inquiries that were not initiated by you.
If you do not get a positive resolution directly from the reporting company, go back through the information you submitted with a fine-toothed comb. Did you include your Social Security number? Did attach a copy of the receipt that shows you did pay your bill on time? Did you include your full name and signature? Sometimes it's the simplest things that stand in the way of you and the truth. (TrueCredit.com provides detailed information on the right way to file a dispute.)
Times to turn to the credit-reporting agency instead of the reporting entity include:
Righting erroneous personal information -- such as address, contact information, social security number, married or maiden name.
Getting contact information for a company that's providing information about you.
Remedying misinformation being reported about a closed or expired account. (Sometimes contacting the lender with whom you no longer have an active business arrangement can cause confusion.)
Removing information about someone else reported in your file.
If the credit reporting agency cannot verify reported information one way or another within 30 days, it will temporarily remove the item from your record until there is resolution. (Don't bother trying to beat the system by getting a loan during that small window where the misdeed appears to be unreported. It's hard to time, and it creates bad karma.)
After your stint as private investigator, personal lawyer, and professional phone tree operator -- no matter what happens, you, the consumer, have the last word. The Fair Credit Reporting Act made sure that individuals could provide a consumer statement telling their side of the story. If you were injured or suffered a disability and were unable to pay your bills for a while, make a note in your file. If you bought a radio online that arrived broken and the retailer wouldn't issue a refund so you stopped payment, spell it out. If some ugly records are related to an even uglier divorce, fess up.
Chances are the consumer statement will have little bearing on a lending decision from, say, a large credit card company. In that case your creditworthiness is being determined by an automated system. But in situations where you are in contact with a potential lender -- a mortgage broker or your car loan guy -- make sure you draw their attention to your well-worded official explanation.
Dayana Yochim isn't a fighter, except when it comes to righting credit-reporting wrongs. If needed, she'll enlist the army of Fools on the Consumer Credit discussion board to back her up.
Recent Articles by Dayana Yochim
01/11/2005 - Note to Self: Plan Retirement
01/10/2005 - Got Debt? Go Ahead, Invest
01/07/2005 - How to Spend "Special" Money
01/06/2005 - Heal Your Financial Hangover
01/05/2005 - Are You Normal About Money?
The Motley Fool is investors writing for investors. To view Dayana Yochim's current stock holdings, check out his or her online personal profile.
