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Your FICO Score Is a Lie

http://www.fool.com/investing/small-cap/2004/08/20/your-fico-score-is-a-lie.aspx

Dayana Yochim
August 20, 2004

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.

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