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Title: Report Card for the Fair Credit Reporting Act
Author: Stuart Hunter
Article:
"It is the purpose of this title to require that consumer
reporting agencies adopt reasonable procedures for meeting the
needs of commerce for consumer credit, personnel, insurance, and
other information in a manner which is fair and equitable to the
consumer, with regard to the confidentiality, accuracy,
relevancy, and proper utilization of such information in
accordance with the requirements of this title."
In the words of the U.S. Congress, the previous paragraph is the
purpose of the <a
href="http://www.lexingtonlaw.com/credit-education/fcra.html">Fai
r Credit Reporting Act (FCRA)</a>. In short, the Fair Credit
Reporting Act is designed to help protect consumers against
unfair practices within the credit reporting system.
While the mission of the FCRA was a noble one, a quick look
around today's credit society shows the results have fallen well
short of expectations. What follows is how the FCRA has failed
to produce a fair credit system for today's consumers.
<b>Detailing the Failures of the Credit Reporting System</b>
1) <b>Accuracy</b> - It is well documented that credit reports
contain errors but it bears repeating. Recent studies show that
almost 80% of all credit reports contain factual errors such as
duplicate listings, incorrect dates, tradelines placed on the
wrong person's credit reports, and omitted positive credit
accounts.
These studies also indicate that 25% of credit reports
containing errors significant enough to result in a credit
denial.
How fair is a credit system that can cause a person to get
declined for a loan or force them to pay higher interest rates
than are necessary based on their actual credit risk? True, you
have the right to dispute these inaccurate items with the credit
bureaus, but this chore is not necessarily easy or foolproof.
Depending on the nature of the erroneous items on your credit
reports, credit repair can be a frustrating and time consuming
ordeal that you are forced into because of no fault of your own.
2) <b>Relevancy</b> - While they do not say it directly, the
credit bureaus' creation of the VantageScore is evidence enough
that the current FICO based credit scoring models are not as
relevant as they could be. According to Experian spokesman
Donald Girard, the VantageScore is "the most sophisticated,
highly predictive scoring model that's available in the
marketplace" and as a consequence the much more popular FICO
score is less predictive.
One of the flaws in the FICO score that the VantageScore tried
to fix is the impact that very old credit accounts have on the
credit score. According to Dr. Bonnie Guiton Hill, advisor to
President Bush on consumer affairs, "it is our understanding
that computer models that predict credit worthiness find most
information that is more than two years old nonessential." This
is why newly created scoring models like the VantageScore are
beginning to ignore credit information that is over three years
old. It does not serve to accurately determine your credit risk.
So why have lenders been so slow to adopt scoring models such as
the VantageScore? They claim it is because FICO is ingrained in
the current credit system and has stood the test of time. A more
cynical answer is that these lenders are not willing to
sacrifice the huge profits they make from charging higher
interest rates on loans granted to people who are a relatively
low credit risk.
Of course, this cynicism is not simply the result of a general
and unfounded grudge. It is born from the observation that
seemingly every quirk and inconsistency in the credit reporting
system falls in favor of the lenders. For example, when looked
at logically, it makes sense to close unused credit cards. Not
too long ago, financial experts suggested people do exactly this
to make your credit score look better by showing your lack of
need for unsecured credit.
But now we know that closing those accounts can actually lower
your credit score because FICO rewards you for having multiple
accounts and a large amount of credit at your disposal. So while
closing accounts seems to be the financially responsible thing
to so, it is probably more than an odd coincidence that this
behavior which makes you a less profitable consumer for banks
and credit card companies it punished by FICO.
The same goes for paying off installment loans early and
voluntarily lowering credit limits. Both of these actions seem
inline with what we would expect from the ideal consumer, but
neither will have a positive impact on your credit score. Early
payment of installment loans, another common goal of a
financially responsible consumer that diminishes the profits of
lenders, is not noted on your credit reports. And contrary to
what you would think, lowering credit limits would lower your
credit score because as alluded to above, you are rewarded for
having multiple credit accounts and lots of credit at your
disposal.
But by another quirk of the FICO credit scoring model, you are
rewarded for having multiple credit accounts, but you are
punished for seeking new credit. Consumers are told that
inquiries are added to your credit reports each time you apply
for credit so other lenders can see that you may be
overextending yourself or crashing. But isn't it convenient that
inquiries will lower your credit score at the exact time when
you are looking to qualify for new lines of credit? FICO wants
you to have multiple lines of credit, but in trying to appease
the scoring model, you will temporarily lower your credit score
allowing lenders to charge you higher interest rates.
It seems no matter what you do, the deck is stacked against the
consumer.
So while the VantageScore is a step in the right direction, it
is still a long way from producing truly relevant results. This
is because the VantageScore maintains many of the same scoring
quirks exhibited by FICO and still uses the same basic, and very
limited, variables for determining your credit score such as
payment history, amounts owed, and length of credit history.
Your credit score is found by taking these variables as recorded
in your credit reports, plugging them into a predictive model,
and calculating a single three digit number. A late payment for
example will be entered into the formula and will lower your
credit score a set amount based on the amount of time it was
late and how long ago the late payment was reported.
The fundamental flaw in this model, however, is that there is no
accounting for why the payment was late. Whether you were late
in making a payments because the lender did not send you a bill,
because the bills were sent to the wrong address, because you
wrote the wrong amount on the check, because your checks
bounced, or because you blew all your money on illegal drugs; it
is all the same in the eyes of the credit scoring model. Even if
you have a sloppy lender to blame for your late payments, your
credit worthiness in the eyes of lenders will be the same as a
person saddled with a serious drug addiction.
3) <b>Proper Utilization</b> - Given how common it is for a
credit score to be a gross misrepresentation of a person's
credit worthiness, it could be argued that the pervasiveness of
credit scores in the financial market is improper. But in
today's society, the use of credit scores goes well beyond
determining loan amounts and interest rates.
Employers, landlords, insurance companies and others may request
to see your credit score. In today's society your ability to get
a certain job, rent an apartment, or qualify for reasonable
insurance premium can all be dependent on your credit score.
Improper is a subjective term, but being passed over for a job
because of completely irrelevant and possibly inaccurate
negative credit items in your credit reports that are plugged
into a flawed credit scoring model to produce a credit score
that is not indicative of your actual credit worthiness fits the
bill.
<b>The FCRA Made Improvements, but there is Still a Long Way to
Go</b>
The FCRA's failure to produce a system where the "accuracy,
relevancy, and proper utilization" of your information is
protected has resulted in a credit reporting system that is
hardly "fair and equitable" to you as a consumer. But in defense
of Congress, the FCRA has been heavily influenced by
deep-pocketed industry lobbyists. In fact, when the FCRA was
originally passed in 1971, Senator William Proxmire, one of the
bills primary sponsors, felt defeated at what had become of his
original intentions for the bill.
Since that time, the FCRA has been amended to become more and
more consumer friendly, but there is still a ways to go and as
was the case in 1971, those in the credit industry are still
keenly interested in maintaining the status quo.
While the credit bureaus are no longer able to record
information about you such as your ethnicity and religion, they
also are not required to collect other personal information that
is relevant to your credit worthiness. If you are a model
citizen who has worked with the same company for 10 years, has a
perfect criminal record and makes more than enough money to
cover your expenses, it is fairly obvious that you are more
worthy of credit than a career criminal who is a continual
burden on the system. But none of this information is recorded
by the credit bureaus or used when calculating your credit
score. If you and the career criminal have the same types of
accounts on your credit reports, your credit scores will be the
same.
Also, while you now have the ability to see what information is
contained within your credit reports, you do not have the
ability to learn any more than the very basics of how this
information is used to formulate your credit score. What impact
will paying off a past due debt have on your credit? Which
credit cards should be paid down first? What effect will
shopping for a new loan have on your credit score? We have
vague, observation based answers for these questions, but the
exact formula is unknown and is subject to change at any time.
Finally, you have the right to dispute the questionable items in
your credit reports, but you don't have the right for this
process to be easy or necessarily effective. Depending on your
unique situation, credit repair can be as easy as submitting an
online form or as difficult as tracking down creditors, fighting
with collections agencies, and possibly involving legal
intervention. The very entities who profit most from inaccurate
credit reporting are the ones who played such a big role in
watering down the FCRA and continue to resist consumer attempts
to add equity to the credit system. It is these entities you are
forced to contend with when working to enforce your right to a
fair and accurate credit report.
About the author:
The <a
href="http://www.squidoo.com/fair-credit-reporting-act">credit
system</a> is unfairly punishing millions of Americans but
fortunately you have the right to work towards a fair and
accurate credit score. Whether practicing credit repair on your
own or with the help of a credit repair expert like <a
href="http://www.lexingtonlaw.com">Lexington Law</a>, you start
the process of taking control of your credit immediately.
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