Posts Tagged Fair Credit Reporting Act
The Importance of Credit Reporting Laws
Jeremy L Roberts asked:
Credit reporting laws in the United States can be rather difficult to understand if you are not an attorney or don’t happen to work in finance. When it comes to your personal credit, understanding credit reporting laws is important.
The Fair Credit Reporting Act is one law every consumer should know. It was originally signed into law in 1970 and it guarantees the confidential, accurate, relevant and proper handling of all consumer information collected and recorded by the credit bureaus. It also gives consumers the right to request a copy of their credit report and scores. The only provider that is legally authorized to give you this report once a year is annualcreditreport.com.
This law also requires that written disputes be investigated within 30 days by credit bureaus. Here, any information deemed inaccurate or unverifiable shall be removed and kept from reappearing on your credit report.
Another important credit reporting law is the Fair Debt Collection Practices Act. This law was enacted in 1977 in an effort to eliminate abusive debt collection practices by debt collectors and to ensure that those debt collectors who refrain from using them are not competitively disadvantaged. It also promotes state action that is consistent in protecting consumers against such debt collection abuses. It prohibits several activities considered to be deceptive or harmful to consumers such as: lying, misleading or harassing. This law is enforced by the Federal Trade Commission and annually reports to congress regarding any issues that involve it. Here, a debt collector is defined as any person who uses any method of interstate commerce of the mail in any business for the purpose of collecting debts.
This means the rules of this law do not apply to the company who extended the original credit line, but instead are only relevant for collection companies who were hired or contracted by the initial creditor involved.
When it comes to how your credit is reported and what the scores mean, you need to have a rough idea of how it all works so you will be able to interpret any problems and come up with a solution for repairing them. After all, your credit is a very important part of your life in general as it affects many different aspects all at once.
Pamela
Credit reporting laws in the United States can be rather difficult to understand if you are not an attorney or don’t happen to work in finance. When it comes to your personal credit, understanding credit reporting laws is important.
The Fair Credit Reporting Act is one law every consumer should know. It was originally signed into law in 1970 and it guarantees the confidential, accurate, relevant and proper handling of all consumer information collected and recorded by the credit bureaus. It also gives consumers the right to request a copy of their credit report and scores. The only provider that is legally authorized to give you this report once a year is annualcreditreport.com.
This law also requires that written disputes be investigated within 30 days by credit bureaus. Here, any information deemed inaccurate or unverifiable shall be removed and kept from reappearing on your credit report.
Another important credit reporting law is the Fair Debt Collection Practices Act. This law was enacted in 1977 in an effort to eliminate abusive debt collection practices by debt collectors and to ensure that those debt collectors who refrain from using them are not competitively disadvantaged. It also promotes state action that is consistent in protecting consumers against such debt collection abuses. It prohibits several activities considered to be deceptive or harmful to consumers such as: lying, misleading or harassing. This law is enforced by the Federal Trade Commission and annually reports to congress regarding any issues that involve it. Here, a debt collector is defined as any person who uses any method of interstate commerce of the mail in any business for the purpose of collecting debts.
This means the rules of this law do not apply to the company who extended the original credit line, but instead are only relevant for collection companies who were hired or contracted by the initial creditor involved.
When it comes to how your credit is reported and what the scores mean, you need to have a rough idea of how it all works so you will be able to interpret any problems and come up with a solution for repairing them. After all, your credit is a very important part of your life in general as it affects many different aspects all at once.
Pamela
Disputing Credit Report Information
Jenny R Smith asked:
Information obtained from your credit report enables creditors to gauge the risk factor in lending money to you. Credit report usually provides information on your identity and on how regularly you pay your bills. Credit report is used as the deciding factor by creditors when you apply for credit facility.
Thus, it is vital that you maintain a good credit report consciously. Incorrect information on your report could be damaging in the long term and will affect your buying power drastically. It is therefore necessary to monitor and make sure your information with the credit reporting agencies is updated and accurate.
In case of any discrepancies in your information or rating, you can dispute the credit report information with the help of the Fair Credit Reporting Act or the FCRA.
Review Your Credit Report
The first step in verifying your credit report is to obtain a copy of one. According to Federal law, you are eligible to one copy of credit report from each of the agencies annually. After obtaining your credit report, go through it thoroughly to ensure that the information reported is correct or not. In case of incorrect information, you can dispute the same with the help of the Fair Credit Reporting Act or the FCRA.
File A Credit Report Dispute
Upon finding incorrect information in your credit report the first step should be to alert the credit bureau and the source of your information in writing. Doing this puts you on the path to dispute the wrong information.
The next step involves attaching proof supporting your claim. This includes statements or checks which have been canceled. Along with this it is a good idea to include your personal details like name, current postal address, and information on dispute and explanation on why the information is incorrect. To provide a clear picture, you could include a copy of the credit report highlighting the disputed information.
These documents have to be then dispatched through certified mail requesting for a return receipt. This will make sure you have proof your mail has been received by the credit bureau. It is very important to keep a copy of all the documents you send them.
The Credit Bureau Responds To Your Dispute
The credit bureau usually takes about thirty days to respond to your claim after checking all the necessary information and facts. Credit bureau sends the disputed facts to the information provider which in turn investigates the same and reports back to the bureau.
Upon completion of the investigation, the credit bureau provides you with the results. In case the dispute has been accepted and facts altered, the bureau provides you with a free copy of the changed report. Credit bureau can also be requested to send the correction to any other company which may have accessed your credit report in the past six months.
After all this, it is a good idea to check the other credit bureaus as well and set right the information.
Javier
Information obtained from your credit report enables creditors to gauge the risk factor in lending money to you. Credit report usually provides information on your identity and on how regularly you pay your bills. Credit report is used as the deciding factor by creditors when you apply for credit facility.
Thus, it is vital that you maintain a good credit report consciously. Incorrect information on your report could be damaging in the long term and will affect your buying power drastically. It is therefore necessary to monitor and make sure your information with the credit reporting agencies is updated and accurate.
In case of any discrepancies in your information or rating, you can dispute the credit report information with the help of the Fair Credit Reporting Act or the FCRA.
Review Your Credit Report
The first step in verifying your credit report is to obtain a copy of one. According to Federal law, you are eligible to one copy of credit report from each of the agencies annually. After obtaining your credit report, go through it thoroughly to ensure that the information reported is correct or not. In case of incorrect information, you can dispute the same with the help of the Fair Credit Reporting Act or the FCRA.
File A Credit Report Dispute
Upon finding incorrect information in your credit report the first step should be to alert the credit bureau and the source of your information in writing. Doing this puts you on the path to dispute the wrong information.
The next step involves attaching proof supporting your claim. This includes statements or checks which have been canceled. Along with this it is a good idea to include your personal details like name, current postal address, and information on dispute and explanation on why the information is incorrect. To provide a clear picture, you could include a copy of the credit report highlighting the disputed information.
These documents have to be then dispatched through certified mail requesting for a return receipt. This will make sure you have proof your mail has been received by the credit bureau. It is very important to keep a copy of all the documents you send them.
The Credit Bureau Responds To Your Dispute
The credit bureau usually takes about thirty days to respond to your claim after checking all the necessary information and facts. Credit bureau sends the disputed facts to the information provider which in turn investigates the same and reports back to the bureau.
Upon completion of the investigation, the credit bureau provides you with the results. In case the dispute has been accepted and facts altered, the bureau provides you with a free copy of the changed report. Credit bureau can also be requested to send the correction to any other company which may have accessed your credit report in the past six months.
After all this, it is a good idea to check the other credit bureaus as well and set right the information.
Javier
Credit Reports Demystified
Ray Dando asked:
Anyone who has ever applied for any type of credit like a credit card, a mortgage, or even a cell phone has likely had their credit report checked. If the report says that you are late paying bills or have a ton of debt, you could have to pay a higher interest rate or even get turned down altogether.
Scott Mitic, CEO of an Identity Theft Protection service, says it quite well: the “credit bureaus are at the center of our credit-eco system in the U.S. And it’s hard to think about a set of companies that are more instrumental in the life that we live”.
What is a Credit Report?
A credit report is basically a file that a Credit Reporting Agency (CRA) keeps on you. Despite what many people think, your credit score does not say whether you have “good credit” or “bad credit” and if you are a risk. That determination is made by the lenders. All a CRA does is collect the information and then sell it. The information on your credit report is an important factor, but may not be the only one that determines whether the loan is made.
Another misconception is that your credit report is a “credit score” (you’ve probably heard of FICO). The credit score is a tool that lenders used based on a special formula that does use the information in your credit report, but the score itself is not part of the report.
Who can access your Credit Report?
Who can see your credit report is outlined by the Fair Credit Reporting Act. Anyone who accesses it must have a “permissable reason” to do so. The groups that can see it are:
Potential Lenders – Credit card companies, mortgage lenders, landlords, and other lenders are the most common. Whenever they request to see your report, a note of that becomes actually part of the report (called a “hard inquiry”). More on that later. Potential employers – A special (less detailed) version of your report. They must have written permission to do so. All they are able to see is how you make payments and handle debt, which (theoretically in their mind) shows your trustworthiness. This is a “soft inquiry” which does not show up on your report. Pre-approved credit card offerers – They can not actually see your credit report (thankfully), but they can pull a specially screened list to see if you qualify. This is also a “soft inquiry” which does not appear on your report. You – Obviously, you are able to see your own report.
What is on a Credit Report?
Credit history – Bill paying history (late payments etc.), balances, credit limits, open or closed accounts Personal information- Name, address history, work history, social security number Public information – Information from public records such as bankruptcies, court orders, tax liens, etc. Inquiries – Any company who has done a “hard inquiry” shows up. This is why you want to be careful in how many credit cards you sign up for or loans you request, because every time a company runs a credit check, that becomes part of your report (whether you take the loan or not). Disputes – If there is a dispute over something on a report, both your statements and the lender’s will be noted.
What do creditors look for?
Potential lenders make the decision whether or not to extend credit based on the contents of the report. Here are some of the things that they look for:
Missed payments – Payment history is a large factor. If you have a bunch of missed or late payments, lenders would be less inclined to take a risk of the same thing happening to them
Anyone who has ever applied for any type of credit like a credit card, a mortgage, or even a cell phone has likely had their credit report checked. If the report says that you are late paying bills or have a ton of debt, you could have to pay a higher interest rate or even get turned down altogether.
Scott Mitic, CEO of an Identity Theft Protection service, says it quite well: the “credit bureaus are at the center of our credit-eco system in the U.S. And it’s hard to think about a set of companies that are more instrumental in the life that we live”.
What is a Credit Report?
A credit report is basically a file that a Credit Reporting Agency (CRA) keeps on you. Despite what many people think, your credit score does not say whether you have “good credit” or “bad credit” and if you are a risk. That determination is made by the lenders. All a CRA does is collect the information and then sell it. The information on your credit report is an important factor, but may not be the only one that determines whether the loan is made.
Another misconception is that your credit report is a “credit score” (you’ve probably heard of FICO). The credit score is a tool that lenders used based on a special formula that does use the information in your credit report, but the score itself is not part of the report.
Who can access your Credit Report?
Who can see your credit report is outlined by the Fair Credit Reporting Act. Anyone who accesses it must have a “permissable reason” to do so. The groups that can see it are:
Potential Lenders – Credit card companies, mortgage lenders, landlords, and other lenders are the most common. Whenever they request to see your report, a note of that becomes actually part of the report (called a “hard inquiry”). More on that later. Potential employers – A special (less detailed) version of your report. They must have written permission to do so. All they are able to see is how you make payments and handle debt, which (theoretically in their mind) shows your trustworthiness. This is a “soft inquiry” which does not show up on your report. Pre-approved credit card offerers – They can not actually see your credit report (thankfully), but they can pull a specially screened list to see if you qualify. This is also a “soft inquiry” which does not appear on your report. You – Obviously, you are able to see your own report.
What is on a Credit Report?
Credit history – Bill paying history (late payments etc.), balances, credit limits, open or closed accounts Personal information- Name, address history, work history, social security number Public information – Information from public records such as bankruptcies, court orders, tax liens, etc. Inquiries – Any company who has done a “hard inquiry” shows up. This is why you want to be careful in how many credit cards you sign up for or loans you request, because every time a company runs a credit check, that becomes part of your report (whether you take the loan or not). Disputes – If there is a dispute over something on a report, both your statements and the lender’s will be noted.
What do creditors look for?
Potential lenders make the decision whether or not to extend credit based on the contents of the report. Here are some of the things that they look for:
Missed payments – Payment history is a large factor. If you have a bunch of missed or late payments, lenders would be less inclined to take a risk of the same thing happening to them
Debt/Income ratio – Lenders want to make sure that you have enough income to handle debt payments
Inquiries – As mentioned, whenever a lender checks your credit using a “hard inquiry” a note is made on your report. If a potential lender sees a lot of hard inquiries over a relatively short period of time, they get concerned that you might be racking up the debt
Open accounts – If you have a bunch of credit cards or loans, even if you don’t use them all, lenders are concerned. They want to make sure that if you were to borrow all the amount that you theoretically could, you would still be able to handle it
Maxed-out credit – Do you typically max out your credit cards or lines of credit? That is a signal to lenders that you need to rely on credit to make ends meet
What do you do if you see errors?
According to the Public Interest Research Group, 79% of credit reports have errors, and 25% have errors significant enough to make lenders refuse credit.
It’s recommended that you check your credit report at least on a yearly basis. If you find a mistake, it can be a long and arduous process to fix it, but it’s important that you do. To correct the error:
Collect and prepare as much documentation as you can to support the correction Contact the relevant credit bureau, explaining what the error is. I recommend doing this via registered letter and including copies of all the documentation just to save back and forth later. Send a similar letter to the creditor as they will need to be involved sooner or later
Remember that neither the CRA nor the creditor have any vested interest in correcting the report, so expect some frustration when going through this process. Make sure you make note of every interaction with them and record dates, times, and who you talked to.
Legally, the CRA has 30 days to investigate your claim, so keep on them and be persistent.
Your credit report is one of the most important files in your life, and no one has motivation to make sure it is accurate but you. The more you know about it, the more power you have.
Theodore
5 Best Credit Repair Tips Will Fix Your Credit Report And Score Now!
Helen Hecker asked:
Today having good credit reflected in your credit report is important in every financial situation you find yourself in as you probably know and knowing a few tips about credit repair can solve a lot of your credit problems. In our world credit determines just how much interest you’ll end up paying on your house, car, truck, etc.
Your credit scores, called FICO, are used by your landlords, your employers and the insurance companies to determine whether you can get an apartment and/or job and even what your insurance rates will be. Yes your insurance agent will make use of your credit information. Your credit report and score will indicate whether you have good credit or bad credit and whether you have to pay a deposit for a cell phone.
Assuming you already have a copy of your credit report, here are a few of the best credit repair tips if you’re having credit problems. If you don’t have a copy you can easily get a free credit report online. You won’t be able to get the score along with the free report though. There are other ways to get your FICO score that you would have to pay for but there are ways to get your score for free.
1. Get a copy of the ‘Fair Credit Reporting Act’ from the federal government. It may sound boring but you don’t have to read the entire legal portion, just understand the basics of the Act. You’ll be well-armed if you plan to fix your credit report. But it’s very important that you get it and read it. It won’t take long.
2. Did you know that any information on your credit report can be disputed? That includes any personal information – public records, any accounts you have of course, even any inquiries. You can dispute anything.
3. Consider credit repair to be a gradual process. Look over the information, your credit card accounts and other accounts. Let’s say you have 15 accounts that you’d like to dispute. Pick just 3 or 4 or so to dispute. Otherwise if you dispute them all at one time the credit bureau or credit reporting agency will not consider your requests seriously.
4. You want to keep your letters of dispute on the simple side. You don’t need to go into the laws, procedures any court rulings or even threaten them with lawsuits if they don’t fix your credit report. Just make it simple.
Just dispute the accounts you have decided to start with – those that need to be removed, updated or changed. Now if your letter is too confusing, there is a good chance it will get tossed. You don’t need to go into any personal tales. Just keep it simple and short.
5. Lastly the ‘procedural request’ – asking for the method of verification. If you get some accounts deleted that’s good. But for those that came back “verified” you can ask for a ‘procedural request.’ The credit reporting agencies and credit bureaus are obligated by law to provide you with the exact method your creditors used to verify the information that they are reporting to the agency on your credit report. Requesting this information, forces the credit bureau to provide you with the information they received from your creditor as valid proof.
The creditor needs to have proof of why if they replied to your dispute stating that your account should remain on your credit report. The creditor rarely ever provides the credit reporting agency or credit bureau with this information. So, by doing this you’re putting pressure on them to prove it. Otherwise they will have to remove it.
Make sure to keep records of everything the bureaus and your creditors send to you in case you find some day that you have to sue them for violating your federal rights. If you follow these credit repair tips you should be well on your way to fixing your credit for good!
PABLO
Today having good credit reflected in your credit report is important in every financial situation you find yourself in as you probably know and knowing a few tips about credit repair can solve a lot of your credit problems. In our world credit determines just how much interest you’ll end up paying on your house, car, truck, etc.
Your credit scores, called FICO, are used by your landlords, your employers and the insurance companies to determine whether you can get an apartment and/or job and even what your insurance rates will be. Yes your insurance agent will make use of your credit information. Your credit report and score will indicate whether you have good credit or bad credit and whether you have to pay a deposit for a cell phone.
Assuming you already have a copy of your credit report, here are a few of the best credit repair tips if you’re having credit problems. If you don’t have a copy you can easily get a free credit report online. You won’t be able to get the score along with the free report though. There are other ways to get your FICO score that you would have to pay for but there are ways to get your score for free.
1. Get a copy of the ‘Fair Credit Reporting Act’ from the federal government. It may sound boring but you don’t have to read the entire legal portion, just understand the basics of the Act. You’ll be well-armed if you plan to fix your credit report. But it’s very important that you get it and read it. It won’t take long.
2. Did you know that any information on your credit report can be disputed? That includes any personal information – public records, any accounts you have of course, even any inquiries. You can dispute anything.
3. Consider credit repair to be a gradual process. Look over the information, your credit card accounts and other accounts. Let’s say you have 15 accounts that you’d like to dispute. Pick just 3 or 4 or so to dispute. Otherwise if you dispute them all at one time the credit bureau or credit reporting agency will not consider your requests seriously.
4. You want to keep your letters of dispute on the simple side. You don’t need to go into the laws, procedures any court rulings or even threaten them with lawsuits if they don’t fix your credit report. Just make it simple.
Just dispute the accounts you have decided to start with – those that need to be removed, updated or changed. Now if your letter is too confusing, there is a good chance it will get tossed. You don’t need to go into any personal tales. Just keep it simple and short.
5. Lastly the ‘procedural request’ – asking for the method of verification. If you get some accounts deleted that’s good. But for those that came back “verified” you can ask for a ‘procedural request.’ The credit reporting agencies and credit bureaus are obligated by law to provide you with the exact method your creditors used to verify the information that they are reporting to the agency on your credit report. Requesting this information, forces the credit bureau to provide you with the information they received from your creditor as valid proof.
The creditor needs to have proof of why if they replied to your dispute stating that your account should remain on your credit report. The creditor rarely ever provides the credit reporting agency or credit bureau with this information. So, by doing this you’re putting pressure on them to prove it. Otherwise they will have to remove it.
Make sure to keep records of everything the bureaus and your creditors send to you in case you find some day that you have to sue them for violating your federal rights. If you follow these credit repair tips you should be well on your way to fixing your credit for good!
PABLO
Ways To Resolve A Credit Report Dispute
Sandra Stammberger asked:
Under the Fair Credit Reporting Act the reporting company and the information provider are responsible for correcting any credit report disputes. However, they must first be made aware that you have credit report disputes. A person can report and correct errors in their credit report by following two easy steps.
Step one is to report your error to the consumer reporting company in writing and make them aware that you have a credit report dispute. Make sure you include all your personal information like your name, address, and a list of each credit report dispute that have. Remember to send your letter by certified mail to prove that you have initiated a credit report dispute. The consumer reporting company will then investigate your credit report disputes and respond in 30 days. If they find there is an error and the credit report dispute can be resolved by correcting it then they will forward the information to the other credit bureaus and your credit report will be revised.
After reviewing your credit report dispute the consumer reporting company may decide that they disagree with the items raised in your credit report dispute and decline to pursue the matter any further. They will send you all of the evidence that they have and the reasons for not pursuing your credit report dispute, along with a copy of your credit report.
Another way to handle a credit report dispute is to contact the particular creditor directly. Again, send the creditor a list of your credit report disputes in writing. Be sure to call your creditor and ask for the specific address of where credit report dispute issues need to be sent to ensure that there is no unnecessary delay in the credit report dispute being investigated. Many companies have a separate address for handling credit report disputes and it can take time for it to be forwarded to the correct address if you do not send it there initially. If you are correct in your credit report dispute and there is an error they will report the error to the credit bureaus and send you notification of the change.
Below is a sample credit report dispute letter :
Date
Your Name
Your Address, City, State, Zip Code
Complaint Department
Name of Company
Address
City, State, Zip Code
Dear Sir or Madam:
I am writing to dispute the following information in my file. I have circled the items I dispute on the attached copy of the report I received.
This item (identify item(s) disputed by name of source, such as creditors or tax court, and identify type of item, such as credit account, judgment, etc.) is (inaccurate or incomplete) because (describe what is inaccurate or incomplete and why). I am requesting that the item be removed (or request another specific change) to correct the information.
Enclosed are copies of (use this sentence if applicable and describe any enclosed documentation, such as payment records, court documents) supporting my position. Please reinvestigate this (these) matter(s) and (delete or correct) the disputed item(s) as soon as possible.
Sincerely,
Your name
Enclosures: (List what you are enclosing.)
MERVIN
Under the Fair Credit Reporting Act the reporting company and the information provider are responsible for correcting any credit report disputes. However, they must first be made aware that you have credit report disputes. A person can report and correct errors in their credit report by following two easy steps.
Step one is to report your error to the consumer reporting company in writing and make them aware that you have a credit report dispute. Make sure you include all your personal information like your name, address, and a list of each credit report dispute that have. Remember to send your letter by certified mail to prove that you have initiated a credit report dispute. The consumer reporting company will then investigate your credit report disputes and respond in 30 days. If they find there is an error and the credit report dispute can be resolved by correcting it then they will forward the information to the other credit bureaus and your credit report will be revised.
After reviewing your credit report dispute the consumer reporting company may decide that they disagree with the items raised in your credit report dispute and decline to pursue the matter any further. They will send you all of the evidence that they have and the reasons for not pursuing your credit report dispute, along with a copy of your credit report.
Another way to handle a credit report dispute is to contact the particular creditor directly. Again, send the creditor a list of your credit report disputes in writing. Be sure to call your creditor and ask for the specific address of where credit report dispute issues need to be sent to ensure that there is no unnecessary delay in the credit report dispute being investigated. Many companies have a separate address for handling credit report disputes and it can take time for it to be forwarded to the correct address if you do not send it there initially. If you are correct in your credit report dispute and there is an error they will report the error to the credit bureaus and send you notification of the change.
Below is a sample credit report dispute letter :
Date
Your Name
Your Address, City, State, Zip Code
Complaint Department
Name of Company
Address
City, State, Zip Code
Dear Sir or Madam:
I am writing to dispute the following information in my file. I have circled the items I dispute on the attached copy of the report I received.
This item (identify item(s) disputed by name of source, such as creditors or tax court, and identify type of item, such as credit account, judgment, etc.) is (inaccurate or incomplete) because (describe what is inaccurate or incomplete and why). I am requesting that the item be removed (or request another specific change) to correct the information.
Enclosed are copies of (use this sentence if applicable and describe any enclosed documentation, such as payment records, court documents) supporting my position. Please reinvestigate this (these) matter(s) and (delete or correct) the disputed item(s) as soon as possible.
Sincerely,
Your name
Enclosures: (List what you are enclosing.)
MERVIN
Report Card for the Fair Credit Reporting Act
Stuart Hunter asked:
“It is the purpose of this title to require that consumer reporting agencies adopt reasonable procedures for meeting the needs of commerce for consumer credit, personnel, insurance, and other information in a manner which is fair and equitable to the consumer, with regard to the confidentiality, accuracy, relevancy, and proper utilization of such information in accordance with the requirements of this title.”
In the words of the U.S. Congress, the previous paragraph is the purpose of the Fair Credit Reporting Act (FCRA). In short, the Fair Credit Reporting Act is designed to help protect consumers against unfair practices within the credit reporting system.
While the mission of the FCRA was a noble one, a quick look around today’s credit society shows the results have fallen well short of expectations. What follows is how the FCRA has failed to produce a fair credit system for today’s consumers.
Detailing the Failures of the Credit Reporting System
1) Accuracy – It is well documented that credit reports contain errors but it bears repeating. Recent studies show that almost 80% of all credit reports contain factual errors such as duplicate listings, incorrect dates, tradelines placed on the wrong person’s credit reports, and omitted positive credit accounts.
These studies also indicate that 25% of credit reports containing errors significant enough to result in a credit denial.
How fair is a credit system that can cause a person to get declined for a loan or force them to pay higher interest rates than are necessary based on their actual credit risk? True, you have the right to dispute these inaccurate items with the credit bureaus, but this chore is not necessarily easy or foolproof. Depending on the nature of the erroneous items on your credit reports, credit repair can be a frustrating and time consuming ordeal that you are forced into because of no fault of your own.
2) Relevancy – While they do not say it directly, the credit bureaus’ creation of the VantageScore is evidence enough that the current FICO based credit scoring models are not as relevant as they could be. According to Experian spokesman Donald Girard, the VantageScore is “the most sophisticated, highly predictive scoring model that’s available in the marketplace” and as a consequence the much more popular FICO score is less predictive.
One of the flaws in the FICO score that the VantageScore tried to fix is the impact that very old credit accounts have on the credit score. According to Dr. Bonnie Guiton Hill, advisor to President Bush on consumer affairs, “it is our understanding that computer models that predict credit worthiness find most information that is more than two years old nonessential.” This is why newly created scoring models like the VantageScore are beginning to ignore credit information that is over three years old. It does not serve to accurately determine your credit risk.
So why have lenders been so slow to adopt scoring models such as the VantageScore? They claim it is because FICO is ingrained in the current credit system and has stood the test of time. A more cynical answer is that these lenders are not willing to sacrifice the huge profits they make from charging higher interest rates on loans granted to people who are a relatively low credit risk.
Of course, this cynicism is not simply the result of a general and unfounded grudge. It is born from the observation that seemingly every quirk and inconsistency in the credit reporting system falls in favor of the lenders. For example, when looked at logically, it makes sense to close unused credit cards. Not too long ago, financial experts suggested people do exactly this to make your credit score look better by showing your lack of need for unsecured credit.
But now we know that closing those accounts can actually lower your credit score because FICO rewards you for having multiple accounts and a large amount of credit at your disposal. So while closing accounts seems to be the financially responsible thing to so, it is probably more than an odd coincidence that this behavior which makes you a less profitable consumer for banks and credit card companies it punished by FICO.
The same goes for paying off installment loans early and voluntarily lowering credit limits. Both of these actions seem inline with what we would expect from the ideal consumer, but neither will have a positive impact on your credit score. Early payment of installment loans, another common goal of a financially responsible consumer that diminishes the profits of lenders, is not noted on your credit reports. And contrary to what you would think, lowering credit limits would lower your credit score because as alluded to above, you are rewarded for having multiple credit accounts and lots of credit at your disposal.
But by another quirk of the FICO credit scoring model, you are rewarded for having multiple credit accounts, but you are punished for seeking new credit. Consumers are told that inquiries are added to your credit reports each time you apply for credit so other lenders can see that you may be overextending yourself or crashing. But isn’t it convenient that inquiries will lower your credit score at the exact time when you are looking to qualify for new lines of credit? FICO wants you to have multiple lines of credit, but in trying to appease the scoring model, you will temporarily lower your credit score allowing lenders to charge you higher interest rates.
It seems no matter what you do, the deck is stacked against the consumer.
So while the VantageScore is a step in the right direction, it is still a long way from producing truly relevant results. This is because the VantageScore maintains many of the same scoring quirks exhibited by FICO and still uses the same basic, and very limited, variables for determining your credit score such as payment history, amounts owed, and length of credit history.
Your credit score is found by taking these variables as recorded in your credit reports, plugging them into a predictive model, and calculating a single three digit number. A late payment for example will be entered into the formula and will lower your credit score a set amount based on the amount of time it was late and how long ago the late payment was reported.
The fundamental flaw in this model, however, is that there is no accounting for why the payment was late. Whether you were late in making a payments because the lender did not send you a bill, because the bills were sent to the wrong address, because you wrote the wrong amount on the check, because your checks bounced, or because you blew all your money on illegal drugs; it is all the same in the eyes of the credit scoring model. Even if you have a sloppy lender to blame for your late payments, your credit worthiness in the eyes of lenders will be the same as a person saddled with a serious drug addiction.
3) Proper Utilization – Given how common it is for a credit score to be a gross misrepresentation of a person’s credit worthiness, it could be argued that the pervasiveness of credit scores in the financial market is improper. But in today’s society, the use of credit scores goes well beyond determining loan amounts and interest rates.
Employers, landlords, insurance companies and others may request to see your credit score. In today’s society your ability to get a certain job, rent an apartment, or qualify for reasonable insurance premium can all be dependent on your credit score.
Improper is a subjective term, but being passed over for a job because of completely irrelevant and possibly inaccurate negative credit items in your credit reports that are plugged into a flawed credit scoring model to produce a credit score that is not indicative of your actual credit worthiness fits the bill.
The FCRA Made Improvements, but there is Still a Long Way to Go
The FCRA’s failure to produce a system where the “accuracy, relevancy, and proper utilization” of your information is protected has resulted in a credit reporting system that is hardly “fair and equitable” to you as a consumer. But in defense of Congress, the FCRA has been heavily influenced by deep-pocketed industry lobbyists. In fact, when the FCRA was originally passed in 1971, Senator William Proxmire, one of the bills primary sponsors, felt defeated at what had become of his original intentions for the bill.
Since that time, the FCRA has been amended to become more and more consumer friendly, but there is still a ways to go and as was the case in 1971, those in the credit industry are still keenly interested in maintaining the status quo.
While the credit bureaus are no longer able to record information about you such as your ethnicity and religion, they also are not required to collect other personal information that is relevant to your credit worthiness. If you are a model citizen who has worked with the same company for 10 years, has a perfect criminal record and makes more than enough money to cover your expenses, it is fairly obvious that you are more worthy of credit than a career criminal who is a continual burden on the system. But none of this information is recorded by the credit bureaus or used when calculating your credit score. If you and the career criminal have the same types of accounts on your credit reports, your credit scores will be the same.
Also, while you now have the ability to see what information is contained within your credit reports, you do not have the ability to learn any more than the very basics of how this information is used to formulate your credit score. What impact will paying off a past due debt have on your credit? Which credit cards should be paid down first? What effect will shopping for a new loan have on your credit score? We have vague, observation based answers for these questions, but the exact formula is unknown and is subject to change at any time.
Finally, you have the right to dispute the questionable items in your credit reports, but you don’t have the right for this process to be easy or necessarily effective. Depending on your unique situation, credit repair can be as easy as submitting an online form or as difficult as tracking down creditors, fighting with collections agencies, and possibly involving legal intervention. The very entities who profit most from inaccurate credit reporting are the ones who played such a big role in watering down the FCRA and continue to resist consumer attempts to add equity to the credit system. It is these entities you are forced to contend with when working to enforce your right to a fair and accurate credit report.
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“It is the purpose of this title to require that consumer reporting agencies adopt reasonable procedures for meeting the needs of commerce for consumer credit, personnel, insurance, and other information in a manner which is fair and equitable to the consumer, with regard to the confidentiality, accuracy, relevancy, and proper utilization of such information in accordance with the requirements of this title.”
In the words of the U.S. Congress, the previous paragraph is the purpose of the Fair Credit Reporting Act (FCRA). In short, the Fair Credit Reporting Act is designed to help protect consumers against unfair practices within the credit reporting system.
While the mission of the FCRA was a noble one, a quick look around today’s credit society shows the results have fallen well short of expectations. What follows is how the FCRA has failed to produce a fair credit system for today’s consumers.
Detailing the Failures of the Credit Reporting System
1) Accuracy – It is well documented that credit reports contain errors but it bears repeating. Recent studies show that almost 80% of all credit reports contain factual errors such as duplicate listings, incorrect dates, tradelines placed on the wrong person’s credit reports, and omitted positive credit accounts.
These studies also indicate that 25% of credit reports containing errors significant enough to result in a credit denial.
How fair is a credit system that can cause a person to get declined for a loan or force them to pay higher interest rates than are necessary based on their actual credit risk? True, you have the right to dispute these inaccurate items with the credit bureaus, but this chore is not necessarily easy or foolproof. Depending on the nature of the erroneous items on your credit reports, credit repair can be a frustrating and time consuming ordeal that you are forced into because of no fault of your own.
2) Relevancy – While they do not say it directly, the credit bureaus’ creation of the VantageScore is evidence enough that the current FICO based credit scoring models are not as relevant as they could be. According to Experian spokesman Donald Girard, the VantageScore is “the most sophisticated, highly predictive scoring model that’s available in the marketplace” and as a consequence the much more popular FICO score is less predictive.
One of the flaws in the FICO score that the VantageScore tried to fix is the impact that very old credit accounts have on the credit score. According to Dr. Bonnie Guiton Hill, advisor to President Bush on consumer affairs, “it is our understanding that computer models that predict credit worthiness find most information that is more than two years old nonessential.” This is why newly created scoring models like the VantageScore are beginning to ignore credit information that is over three years old. It does not serve to accurately determine your credit risk.
So why have lenders been so slow to adopt scoring models such as the VantageScore? They claim it is because FICO is ingrained in the current credit system and has stood the test of time. A more cynical answer is that these lenders are not willing to sacrifice the huge profits they make from charging higher interest rates on loans granted to people who are a relatively low credit risk.
Of course, this cynicism is not simply the result of a general and unfounded grudge. It is born from the observation that seemingly every quirk and inconsistency in the credit reporting system falls in favor of the lenders. For example, when looked at logically, it makes sense to close unused credit cards. Not too long ago, financial experts suggested people do exactly this to make your credit score look better by showing your lack of need for unsecured credit.
But now we know that closing those accounts can actually lower your credit score because FICO rewards you for having multiple accounts and a large amount of credit at your disposal. So while closing accounts seems to be the financially responsible thing to so, it is probably more than an odd coincidence that this behavior which makes you a less profitable consumer for banks and credit card companies it punished by FICO.
The same goes for paying off installment loans early and voluntarily lowering credit limits. Both of these actions seem inline with what we would expect from the ideal consumer, but neither will have a positive impact on your credit score. Early payment of installment loans, another common goal of a financially responsible consumer that diminishes the profits of lenders, is not noted on your credit reports. And contrary to what you would think, lowering credit limits would lower your credit score because as alluded to above, you are rewarded for having multiple credit accounts and lots of credit at your disposal.
But by another quirk of the FICO credit scoring model, you are rewarded for having multiple credit accounts, but you are punished for seeking new credit. Consumers are told that inquiries are added to your credit reports each time you apply for credit so other lenders can see that you may be overextending yourself or crashing. But isn’t it convenient that inquiries will lower your credit score at the exact time when you are looking to qualify for new lines of credit? FICO wants you to have multiple lines of credit, but in trying to appease the scoring model, you will temporarily lower your credit score allowing lenders to charge you higher interest rates.
It seems no matter what you do, the deck is stacked against the consumer.
So while the VantageScore is a step in the right direction, it is still a long way from producing truly relevant results. This is because the VantageScore maintains many of the same scoring quirks exhibited by FICO and still uses the same basic, and very limited, variables for determining your credit score such as payment history, amounts owed, and length of credit history.
Your credit score is found by taking these variables as recorded in your credit reports, plugging them into a predictive model, and calculating a single three digit number. A late payment for example will be entered into the formula and will lower your credit score a set amount based on the amount of time it was late and how long ago the late payment was reported.
The fundamental flaw in this model, however, is that there is no accounting for why the payment was late. Whether you were late in making a payments because the lender did not send you a bill, because the bills were sent to the wrong address, because you wrote the wrong amount on the check, because your checks bounced, or because you blew all your money on illegal drugs; it is all the same in the eyes of the credit scoring model. Even if you have a sloppy lender to blame for your late payments, your credit worthiness in the eyes of lenders will be the same as a person saddled with a serious drug addiction.
3) Proper Utilization – Given how common it is for a credit score to be a gross misrepresentation of a person’s credit worthiness, it could be argued that the pervasiveness of credit scores in the financial market is improper. But in today’s society, the use of credit scores goes well beyond determining loan amounts and interest rates.
Employers, landlords, insurance companies and others may request to see your credit score. In today’s society your ability to get a certain job, rent an apartment, or qualify for reasonable insurance premium can all be dependent on your credit score.
Improper is a subjective term, but being passed over for a job because of completely irrelevant and possibly inaccurate negative credit items in your credit reports that are plugged into a flawed credit scoring model to produce a credit score that is not indicative of your actual credit worthiness fits the bill.
The FCRA Made Improvements, but there is Still a Long Way to Go
The FCRA’s failure to produce a system where the “accuracy, relevancy, and proper utilization” of your information is protected has resulted in a credit reporting system that is hardly “fair and equitable” to you as a consumer. But in defense of Congress, the FCRA has been heavily influenced by deep-pocketed industry lobbyists. In fact, when the FCRA was originally passed in 1971, Senator William Proxmire, one of the bills primary sponsors, felt defeated at what had become of his original intentions for the bill.
Since that time, the FCRA has been amended to become more and more consumer friendly, but there is still a ways to go and as was the case in 1971, those in the credit industry are still keenly interested in maintaining the status quo.
While the credit bureaus are no longer able to record information about you such as your ethnicity and religion, they also are not required to collect other personal information that is relevant to your credit worthiness. If you are a model citizen who has worked with the same company for 10 years, has a perfect criminal record and makes more than enough money to cover your expenses, it is fairly obvious that you are more worthy of credit than a career criminal who is a continual burden on the system. But none of this information is recorded by the credit bureaus or used when calculating your credit score. If you and the career criminal have the same types of accounts on your credit reports, your credit scores will be the same.
Also, while you now have the ability to see what information is contained within your credit reports, you do not have the ability to learn any more than the very basics of how this information is used to formulate your credit score. What impact will paying off a past due debt have on your credit? Which credit cards should be paid down first? What effect will shopping for a new loan have on your credit score? We have vague, observation based answers for these questions, but the exact formula is unknown and is subject to change at any time.
Finally, you have the right to dispute the questionable items in your credit reports, but you don’t have the right for this process to be easy or necessarily effective. Depending on your unique situation, credit repair can be as easy as submitting an online form or as difficult as tracking down creditors, fighting with collections agencies, and possibly involving legal intervention. The very entities who profit most from inaccurate credit reporting are the ones who played such a big role in watering down the FCRA and continue to resist consumer attempts to add equity to the credit system. It is these entities you are forced to contend with when working to enforce your right to a fair and accurate credit report.
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