You Are Not Your Credit Rating

Imagine that private companies kept a lifetime, detailed record on you. The file determined how much you paid for necessities like a home, car, insurance, and electricity, or even whether you were able to buy them at all. The file would also keep track of when you were offered a job and how much you earned. Now imagine the majority of these records contained mistakes, and that there was no good way to correct them.

Sound like a totalitarian nightmare? That real-life permanent record exists here in the U.S. It's your credit report, and experts say the situation really is that bad. The worst effects fall on people of moderate to lower income as well as racial minorities -- groups that basically pay more to borrow money, if they're not shut out of the credit system altogether. Federal regulatory efforts to correct the mess have been struggling along for 10 years, but private companies are trying new approaches.

Ninety percent of American adults have credit reports. Your credit score depends on what the report says about your number and types of accounts held, length of history, late and overdue payments, whether cards are maxed out, and other information. Then creditors use that score, ranging from 350 to 850, to determine how much to charge for a loan. Someone with a low credit score, in the 500 to 589 range, may be assessed a mortgage rate that is three times higher than someone with an exemplary score over 700.

Currently, according to credit bureau Experian, the nation's average score is 33 points shy of prime, at 677. Providian Financial Corporation estimates that if the average consumer credit score were raised just 30 points, Americans would save $16 billion annually on lower credit card finance charges alone.

The power of these reports is growing. With more use of consumer credit and the ease of accessing info online, credit checks are used by everyone from car insurers to utility companies to prospective employers. And the volume of disputes from individuals has been growing too. According to privacy expert Evan Hendricks, author of Credit Scores and Credit Reports, just one company, Capital One, received about 1,000 disputes per day, in 2001. By 2003, the number had grown to 4,000 per day.

Almost every independent organization that looks at the issue has found a large percentage of errors in credit reports. A 2004 national study by the U.S. PIRGs, for example, found that 79 percent of the credit reports reviewed by consumers had at least one mistake. One out of four reports contained serious errors, like false delinquencies or misattributed accounts, which could lead to being denied a new credit card or offered a much higher rate on a loan.

The fundamental bug in the credit report system, says Hendricks, is the inadequacy of the investigation system. Hendricks has contended in testimony before Congress that "chronic inaccuracies," "inadequate reinvestigations,"  "non-responsiveness," by consumer reporting agencies characterize the industry. He also found there was rampant reinsertion of deleted information and many instances of impermissible use of credit reports. The official dispute "investigation" process involves nothing other than a superficial comparison of the credit bureaus' records with information supplied by creditors. Therefore, even in cases of identity theft, wrong information often persists. The most effective way to ensure results is to threaten a lawsuit.

On May 22, the Federal Trade Commission closed a public comments period on the Fair and Accurate Credit Transactions Act. The FTC is writing regulations to try to improve the report dispute process. The public comments on the site relate Kafkaesque journeys of negotiating with an opaque and unresponsive bureaucracy to fix damaging credit information.