Recently, the Federal Trade Commission (FTC) released a long-awaited report on credit reporting accuracy. The report, which is required under the Fair and Accurate Credit Transaction Act (FACT Act), shows that credit reporting agencies (CRAs) make errors that negatively affect millions of peoples’ credit scores. Without a good credit score, it is difficult if not impossible to qualify for a mortgage, obtain a credit card, buy a car, or finance a small business. Increasingly, even employment and rental housing decisions hinge on credit scores. Overall in today’s society, a credit score has a major impact on a person’s financial life.
In conducting the study, the agency randomly selected roughly 1,000 people with credit histories at the three major national CRAs (Equifax, Experian, and TransUnion). Each study participant was paired with a researcher who assisted the participants in understanding their credit histories and identifying errors. Once the errors were identified, study participants were encouraged to challenge the errors using the Fair Credit Reporting Act’s (FCRA) dispute process.
The study found that 26%, or about one in four consumers, identified at least one potentially material error among their three credits reports that could negatively affect their credit scores. Assuming the same ratio holds true for the population as a whole, 10 million consumers could be paying undeserved higher interest rates. Additionally, although 21% of study participants who reported errors were able to have their reports modified, only 13% had their credit scores changed as a result of such corrections. Among those that were lucky enough to have their scores changed, half of these changes were less than 20 points, which, in most cases, is not large enough to boost credit worthiness. Just 5.2% of participants had their credit scores increased enough to move to a lower credit risk score.
The FTC’s report adds to the growing knowledge that the U.S. credit rating system is flawed. Previous research confirms the FTC findings that one in four consumers have errors in their credit histories that damage their credit scores. Most recently, the Consumer Financial Protection Bureau (CFPB) examined the credit rating system’s infrastructure and found that it is hard for consumers to resolve complaints because of the maze of contracted “data furnishing” companies. Data furnishers provide CRAs with information on over 1.3 billion consumer credit accounts on a monthly basis. The CFPB report found that CRAs pass along their requirements under the FCRA of reporting information accurately and responding to disputes appropriately, to data furnishers. Not only do CRAs pass their legal responsibilities to data furnishers, CRAs do not even verify the information contained in the furnishers’ records, which consumer advocates consider a breach of the FCRA.
The data is particularly concerning when viewed in the context of overall poverty in America. Over 130 million people (43.9% of Americans) do not have enough savings to cover basic expenses for three months if they were to lose their income. Nearly 15% of Americans live below the income poverty line, which is currently defined as $23,550 for a family of four. Additionally, a study by the Congressional Research Service shows that income inequality in the U.S., which has consistently risen since 1969 and is currently at its highest rate in the past 43 years, is such that the top 10% of earners hold 75% of all wealth. Even during the recession, the top 1% of incomes grew 11.6%, while all other incomes grew just 0.2%.
Given such poverty, it is unacceptable that millions of people, due to credit rating agencies’ mistakes, do not achieve one of the key ingredients for getting ahead—a good credit score. CRAs must be required to ensure the accuracy of their credit information. Additionally, the credit reporting and scoring process needs to be more transparent so that consumers know how to review, evaluate, and improve their credit scores. Getting ahead in today’s economy is already hard enough. Shouldn’t consumers at least be able to rely on an accurate and fair credit score?