On Monday February 11th the Federal Trade Commission will release a long awaited 370 page study on credit report accuracy. The study, which was profiled on 60 Minutes Sunday evening, paints a disturbing picture of credit report accuracy and suggests that between 20 million and 42 million consumers have confirmed errors on their credit reports. This suggests an error rate of between 10% and 21%, depending on the FTC’s variable definition of an “error.” And, if the consumer’s error/s appear on all three of their credit reports the numbers balloon to between 60 million and 126 million erroneous credit files across the three major credit bureau databases.
The FTC study results stand in sharp contrast to a credit industry funded study from 2011 that suggests that less than 1% of consumers have meaningful errors on their credit reports. In fairness to the credit reporting industry, the FTC’s results are also significantly better than the results published by the U.S. Public Interest Research Group in 2004, which suggested that 79% of credit reports contain errors of some kind. I always believed the true error rate was somewhere in between and closer to 10% than 1% or 79%.
Errors in credit reports can cost you a loan, a competitive interest rate, a job, security clearance and insurance. The consumer dispute process is largely automated using a system called e-Oscar, which homogenizes consumer disputes into 2 digit codes before asking the source of the disputed information to confirm data accuracy. The credit reporting agencies will almost always take the word of the furnishing party (normally a lender or a collection agency) over the word of the consumer. This is commonly referred to as “parroting” as the credit bureaus are simply repeating to the consumer what the lender or collection agency has told them about the disputed item.
The dispute process is very efficient, which may not be good news for consumers. The process is also very criticized. The distillation of a well crafted consumer dispute into a 1 or 2 sentence dispute “code” clearly leaves behind valuable context. And, supporting documentation sent by consumers is rarely, if ever, provided to the furnishing party in support of the consumer argument, a fact confirmed by the Consumer Financial Protection Bureau in late 2012.
These study results underscore the importance of consumers getting copies of their credit reports, which they can do for free at least once per year thanks to Federal law. Several states also provide for additional free copies of credit reports. However, the take rate for free credit reports is abysmal, about 20 million per year of the 600 million collective credit files in the systems of Equifax, Experian and TransUnion.
According to the FTC study…
26% of their 1,001 study participants identified at least one potentially material error on at least one of their credit reports.
21% of the study participants had a “modification” to at least one of their credit reports after they went through the dispute process.
13% of the study participants had a change in their FICO credit score as a result of the aforementioned modifications. The maximum change in score for over 50% of the 13% was less than 20 points.
Credit file errors were confirmed for 10% to 21% of consumers in the FTC study. When those percentages are weighted up against the credit file database volume the numbers range from 10,000,000 to 42,000,000 errors, per credit reporting agency.
The FTC used different definitions of “error”, which caused the large range of possible error percentages.
The most common type of confirmed material errors were errors on trade lines (account information) and collections.
FICO Score Changes When Credit Report is Corrected
Of the 211 credit reports with a change in score, post dispute, 62 of those reports (29%) had a score increase of >25 points.
Of the 211 credit reports with a change in score, post dispute, 129 of those reports (61%) had a score increase of >10 points.
Of the 211 credit reports with a change in score, post dispute, 65 of those reports (31%) had a score increase that would have moved the consumer into a more favorable risk tier, thus resulting in a better interest rate.
Of the 1,001 participants in the FTC study, 5.2% had a change in their FICO score such that they would have moved into a more favorable risk tier and would likely be offered a lower auto loan interest rate.
Corrected or FULLY Corrected?
Of the 262 study participants who filed disputes of potentially material errors, 206 had a modification by a credit bureau. And, over half of the 206 who had a change on their credit report suggested that there were still errors remaining after the dispute process.
The Consumer Data Industry Association (or, CDIA for short) is the trade association of the credit bureaus. In a statement released at 9am ET on February 11th, 2013 said…
“The FTC released its latest study on credit reports today and reconfirmed the findings of several recent studies that conclude that credit reports are highly accurate…” The statement goes on the state that, “The FTC’s research determined that 2.2% of all credit reports have an error that would increase the price a consumer would pay in the marketplace and that fully 88% of errors were the result of inaccurate information reported by lenders and other data sourced to nationwide credit bureaus.”
Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.