Inaccurate Credit Reports

The three national consumer reporting agencies (CRAs) maintain files on more than 260 million Americans in what has been described as a highly automated, multi-billion dollars “ecosystem.” The credit reports are the bases for the computation of credit scores that determine whether consumers have access to credit and at what price. Inaccurate credit reports lead to unfairly reduced credit scores. Reports and credit scores are used by banks and other sources of credit as well as landlords, insurance companies, and employers. It is not an overstatement to say that credit reports and credit scores are a huge factor in consumer welfare.

If a consumer’s credit report is accurate, incomplete and not misleading, the consumer’s credit score will likely be a fair representation of the consumer’s credit worthiness.

But what if the credit report is inaccurate and that inaccuracy is serious enough to knock down the consumer’s credit score? The upshot will be that the consumer either will not have access to credit at all or will have to pay a higher interest rate. This problem is especially acute when the consumer is attempting to buy a house or condo or is attempting to refinance an existing mortgage loan. It is not surprising that Congress enacted the FCRA in large part to protect consumers from the transmission of inaccurate information about them.

The electronic system leads to an astonishingly high error rate in the credit reports. Various studies sponsored by consumer oriented groups have found that from 12% to 30% of credit reports include errors serious enough to affect the consumers’ credit scores.

The reason such errors persist lies in the automated system the CRAs and their subscribers (such as the banks) use to create credit files. Every month, the nation’s furnishers (mainly banks and debt collectors) send the CRAs data on millions of Americans.

The data is sorted electronically using such indicia as social security numbers, and names, addresses. For various reasons, given the millions of Americans in the CRAs database and the number of Americans with the same or similar name and with social security numbers that closely match, inaccurate information is often electronically associated with the wrong person. One reason for mis-matches is that the CRAs do not insist that all seven of the social security numbers match; instead, the CRAs formulas usually assume that a looser formula (such as 5 of 7 numbers) are a match.

Inaccurate Reports Affect Creditor’s Decisions

When a potential creditor asks for a credit report on someone who has applied for credit, the CRA issues the report electronically from its vast files. When the creditor receives an inaccurate credit report, the creditor will not be making an informed decision. The problem is compounded by the fact that large volume creditors do not make credit decisions with a manual inspection of the applicant’s credit file. Instead, the creditors use formulas to accept or reject credit applications, which formulas depend on the accuracy of the applicant’s credit reports.

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