Your FICO Score Is a Lie

Leave it to Dilbert to skewer the credit reporting industry like no other. In a recent strip Dogbert tells Dilbert that he's starting a credit reporting company and will be the low-cost provider because "all of my data will be wrong."

What about the people who call to complain? "I'll put them on hold until their frustrations turn into debilitating health problems... their last words will be 'Aaaagh!!! I only wanted to buy a minivan!'"

Dogbert, you had me at the first frame. (Admittedly, financial writers have a lower "funny" threshold than most.)

That cartoon dog has a point: Credit reporting agencies have a serious image problem.

  • A June survey by the Public Interest Research Group (PIRG) showed that 80% of all credit reports contain errors -- one in four serious enough to result in denied credit.

  • A group called the Consumer Federation of America (CFA), along with the National Credit Reporting Association (NCRA), issued a study that claims one-third of credit scores are inaccurate.

  • Half of the reports examined in a Consumer Reports study in 2000 contained errors.

Fanning the flames is the spate of high-profile identity theft crimes making local and national news nearly weekly accompanied by human-interest sidebars about a wronged consumer who has suffered atrocities because of an inaccurate FICO score. I'm ready for a knock-down, drag-out before I've even cracked open my file.

Take a deep, cleansing breath, everyone. First, many of those studies rely on a sample size too small to make accurate conclusions. Second, even yours truly has told the story of identity theft with a bit more verve than it probably deserves. (Tight deadlines tend to bring out the adjectives in me.)

That doesn't mean you should dismiss all the talk of reporting bloopers. There's a mind-numbing amount of number crunching happening daily. Turn the tables on the credit reporting industry and it becomes clear that the system is overextended. Fathom the following:

  • There are more than 1,000 consumer reporting agencies (CRAs) in the country. (The industry is dominated by the Big Three: Equifax, Experian, and TransUnion.)

  • Two million credit reports are ordered each day.

  • Two billion pieces of information are added to credit files each month.

  • The average consumer's credit report is updated five times a day.

  • Approximately 100,000 entities report information to the CRAs. That includes lenders, collection agencies, credit card companies, leasing firms -- anyone who extends you credit or reports information about you.

There is almost no structure in place to prevent erroneous information from sneaking into your file. The CRAs take some steps to make sure that the data reported to them comes in a standard format, but no law or government agency exists to keep properly formatted data that's simply incorrect from being reported.

What is the credit reporting industry doing to improve their accuracy? Asking you to double-check their work, that's what.

I don't like that answer, either.

Bad press = more business
The conspiracy theorist in me speculates that the industry relishes bad press. After all, nervous consumers pony up to make sure they're not victims. The rush to market of identity theft guard services simply bolsters my suspicions. And was it just a coincidence when I received notice of a new entry on my report the week before my subscription to a credit-watch service was about to expire?

Luckily, there are a few folks on the Hill looking out for our well-being by enacting laws designed to protect consumers from unfair credit reporting practices. Prior to the 1970s, when several of these laws went into effect, consumers had no right to see the information in their file. As a result, individuals could never dispute the errors until specific laws gave them the power. (For competitive Trivial Pursuit players, they include the Fair Credit Reporting Act (FCRA), the Equal Credit Opportunity Act (ECOA), and the Fair Debt Collection Practices Act (FDCPA).)

Recently, Congress went one further for the little guy: Credit reporting bureaus will soon be required to provide consumers who request it one free report per year. (Currently six states treat their constituents to an annual free report.) That's good news for those in credit la la land. But my neighbors and me on the East Coast won't get our freebie until September 2005.

The "no credit report left behind" initiative will be phased in region by region. Starting in December, those on the West Coast can request a free report. The Midwest gets their due in March 2005, and the South in June 2005. Until then, you'll have to pony up to see whether what's in your file represents the real you.

With the number of alleged errors creeping into the average consumer's report, consider checking your report sooner, rather than too late. If there's a loan in your future (for a home, car, credit card, refinance) a new job, insurance carrier, or you're just plain curious, take a peek at your report. Because if (and some say "when") you find a glaring error, it could take a while to set the record straight.

Personally, I've put this off long enough. I'm bracing myself to see what's in my file. Stay tuned.

TrueCredit -- the consumer arm of TransUnion -- has extended Fool readers a limited-time special offer. Receive a $10 discount on its 3-Report/3-Score package, which includes data from the three major credit bureaus (TransUnion, Equifax, and Experian) as well as credit scores (your GPA of borrowing) from all three entities. Fools pay just $34.95. Click here for details and to see what's in your file right now.


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