Is the Credit Reporting System Broken?

Last week, the Columbus Dispatch published the findings of a yearlong investigation into the credit reporting system. The findings, as you can imagine, didn’t paint a flattering picture of the credit reporting system or the credit reporting agencies. And while consumer advocates and credit industry representatives will probably never agree on whether or not the system is broken, both sides do have valid points.

The True Error Rate is Still Unknown

There have been two recognized studies that purport to quantify the number and severity of errors in consumer credit reports. One was performed by the consumer advocacy group, PIRG in 2004. The second was performed by an industry-funded group called PERC in 2011. I wrote about both studies for Mint, here.

PIRG suggests that roughly 8 in 10 credit reports contain errors, while PERC’s study suggests that less than 1% of credit reports contain material errors. The study results are so far apart that they almost suggest that neither is fully accurate and the true error rate lies somewhere in the middle. Finally, each of these groups clearly has a constituency to represent, which has to call into question the methods and results.

There still isn’t a definitive study on credit report accuracy that you or I should consider to be 100% bi-partisan (consumer vs. industry). As such, we have no clue how many credit reports contain errors. I can tell you this: the credit reporting agencies receive tens of thousands of consumer disputes every single day.

Mixed and Confused Credit Reports

One of the scenarios profiled by the Columbus Dispatch study was the issue of how the credit bureaus match public record data (liens, judgments, and bankruptcies) with consumer credit files and how those records can sometimes end up on the wrong consumer’s credit report.

Your credit report is not a readymade file just waiting for someone to pull it. Instead, it is compiled from scratch every time a company asks for your credit report. The compiling of data is done using sophisticated matching logic, which attempts to collect any credit, collection, and public record data the credit bureaus feel belongs to the subject consumer. Once the credit report is compiled, it can be scored and then delivered to a lender.

There are a variety of items that can be used to match data with a consumer including address, name, Social Security number, and date of birth. The problem is that court records mask your Social Security number from being publically available and some states require the same with date of birth. So, you’re left depending on name and address to determine on whose credit report to place a lien, bankruptcy, or judgment. If your name and address are identical to that belonging to someone else, it can result in a mixed or confused credit file. Think of a father and son who share the same name and live, or have lived, at the same address.

There’s also the issue of human error when filing public records or legal actions. I served as an expert witness in a case where a consumer filed bankruptcy but his bankruptcy attorney transposed two of the numbers in his Social Security Number. The record of the filing showed up on another consumer’s credit report who was the owner of the incorrectly filed Social Security number. It wasn’t the credit bureaus fault and it wasn’t a courthouse filing error. It was the bankruptcy attorney’s error.

The System Isn’t Perfect, But It’s Far From Broken

FICO recently published data showing that 53.2% of the population has a FICO score above 700. That’s over 106,000,000 consumers. And while those consumers may not love credit reporting, they’re certainly not complaining loudly about their credit scores.

Here’s my “20+ years of experience” take on the system:

• Do credit report errors happen?
• Do consumers have to go through the headache of getting errors corrected?
• Do some consumer find it impossible to get errors corrected?
• Do some consumers end up suing to have errors corrected?

The answer is certainly “yes” to each of those questions.

• Are many consumer disputes frivolous, meaning they’re trying to get accurate but negative data removed from their credit reports.
• Are your credit reports accurate the majority of the time?
• Are most disputes satisfactorily rectified within a few weeks from the consumer’s dispute?
• Are many credit report errors “cosmetic”, meaning they have no influence on your credit scores or credit application decisions or rates?

The answer is certainly “yes” to each of those questions as well.

Is the credit reporting system imperfect? Yes. Is it broken? No.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.