One of every five American consumers has an error on his or her credit report and 5% of us endure errors so serious that we likely are being overcharged for credit card debts, auto loans, insurance policies and other financial obligations, according to a comprehensive study issued Monday by federal regulators.
The report by the Federal Trade Commission, completed in December but just released, found that 21% of a representative group of American consumers discovered a "confirmed material error" in at least one of the credit reports issued by the Big Three credit reporting bureaus -- Experian, Equifax and TransUnion. A "confirmed material error" involves information that, when corrected, changed the consumer's credit report.
The study also reported that 5.2% of the representative group found and, with the assistance of the report's researchers, successfully challenged a mistake so serious that it had lowered their credit score substantially enough to burden them with higher interest rates.
The agencies track the credit histories of about 200 million Americans. If the FTC's findings are accurate, that means some 40 million Americans have a mistake on one of their credit reports, and 10 million are potentially overpaying as a result.
"These are eye-opening numbers for American consumers," Howard Shelanski, director of the FTC's Bureau of Economics, said in a prepared statement. "The results of this first of a kind study make it clear that consumers should check their credit reports regularly. If they don't, they are potentially putting their pocketbooks at risk."
Consumer advocates agreed, both with the significance of the study and the path of action that should be taken by wise consumers.
"Consumers should be concerned about mistakes and omissions in credit reports that lead to excessive cost of credit," said Walter Dartland, a former deputy attorney general of Florida and executive director of the Consumer Federation of the Southeast, a nonprofit consumer advocacy group. "What is necessary is a plan to reduce these errors."
Representatives of the credit reporting industry adopted a somewhat different perspective. They said the FTC's report showed that most credit reports are accurate, most errors are insignificant, and credit card companies, banks and other lenders -- rather than the data collecting firms -- were primarily responsible for most of the errors that were found.
Industry: Impact is 'small'
"While the overall number of errors and their impact on consumers' creditworthiness is small, maintaining accurate credit reporting data is essential to both lenders and credit bureaus," Stuart Pratt, president of the Consumer Data Industry Association, which represents 170 consumer data collection firms, said in a written statement. "We will continue to work with lenders and others who provide data to the credit bureaus to make sure the percentage of material errors impacting consumers is even lower."
Though studies on credit reports' accuracy have been conducted over the years by the FTC, industry groups and consumer rights organizations, hard facts concerning the accuracy of credit reports have been difficult to obtain. The industry has said that a fraction of 1% of all credit report had errors; a widely quoted consumer advocacy report found that more than half had some sort of error.
The FTC said the report issued Monday was more comprehensive than any conducted in the past. Agency officials said this was the first national study "designed to engage all the primary groups that participate in the credit reporting and scoring process," including consumers, lenders, data furnishers, FICO and the national credit reporting agencies.
In essence, this latest report came down in the middle, finding a significant volume of errors that affect many consumers, but also expressing its findings in carefully nuanced terms.
"Overall, the results of the study suggest that while a notable number of consumers may have inaccuracies on their credit reports (21% of the participants and 13% of the credit reports have inaccuracies), the impact of these errors on credit scores is generally modest (an average of an 11.8 point increase in score) and often there is no change in the credit score of the report (63% of disputed reports do not change score)," the report said. "For a few consumers, however, the impact is large."
Broken dispute system
And the errors can be difficult to correct and resolve.
"This is a real dilemma because consumers are [sometimes] faced with receiving a different version of their credit reports than is reported to creditors and, even when an error is found, the [credit] bureaus seem to be unwilling to address the consumer's concerns and there appears to be no recourse," said David Jones, president of the Association of Independent Consumer Credit Counseling Agencies, which represents 32 nonprofit credit counseling companies.
In developing their latest study, the FTC's researchers enlisted a demographic cross-section of 1,001 American consumers. Together, the research associates and the consumers reviewed 2,968 credit reports.
Among the findings of the 370-page report:
- 26% of the studied consumers found one or more "potential material errors" in at least one of their credit reports. A "potential material error" involves information that could affect your credit score.
- Nearly 13% of the studied group experienced a change in their FICO credit scores as a result of successfully challenging an error in one or more of their credit reports.
- People with relatively low FICO credit scores at the start were most likely to see some improvement after checking their credit reports.
- Most of the discovered and confirmed "material" errors involved mistakes in the reporting of consumer finance accounts or collections transactions.
- Perhaps most significantly, 52 of the 1,001 participants (5.2%) "experienced a change in score such that their credit risk tier decreased and therefore [they] may be more likely to be offered a lower auto loan interest rate," according to the study.
- A combined 6.3% of those with affected credit scores saw those scores increase by one to 19 points after they challenged reporting errors, though 2.1% saw a 25 to 49 point increase and 2.3% experienced a 50 to 99 point increase.
- Demographically, men and women were equally likely to successfully report a credit score-changing error.
- Consumers between the ages of 51 and 60 were most likely to find confirmed credit report errors and enjoy credit score changes, followed closely by those between 41 and 50 and those over 60.
- Educational attainment appears to have a strong bearing, with consumers with no more than a high school diploma far more likely to be victimized by credit report errors than those with college educations.
Consumers: Check your reports
Though opinions about the significance of the findings differed, everyone agreed that consumers should protect their interests by checking their credit reports and swiftly reporting any errors.
"All consumers should be aware that checking credit reports every year is fundamental to accuracy," said Pratt, the trade group's spokesman.
"Your credit report has information about your finances and your bill-paying history, so it's important to make sure it's accurate," said Charles Harwood, acting director of the FTC's Bureau of Consumer Protection. "The good news for consumers is that credit reports are free through AnnualCreditReport.com, and if you find an error, you can work with the credit reporting company to fix it."
The federal Fair Credit Reporting Act guarantees consumers the right to dispute and remove credit report errors, but CreditCards.com has found that the fixes often are not that easy. Last fall, its investigation, "Why the credit report dispute system is broken," examined how the credit agencies' automated system backfires on many consumers.
"The dispute process has absolutely no value whatsoever for consumers," Leonard Bennett, a consumer lawyer in Newport News, Va., who has repeatedly testified before Congress about the credit report dispute system, told CreditCards.com for that report.
Sunday, the CBS-TV show "60 Minutes" also reported on what it called a broken system for resolving credit report disputes. In response, Pratt denied that the system was broken and again urged consumers to check their credit reports every year for what he called rare errors.
"Federal courts across the nation have repeatedly found that the credit reporting industry dispute process not only follows the letter of the law but its spirit, as well," Pratt said. "The system is successful."
Experian also expressed faith in the credit bureaus' accuracy. "The report shows that the vast majority of errors on credit reports have no bearing on credit scores, for example outdated information on a consumer's phone number or address," the bureau said in a statement posted Monday. "About 2.2% of reports contained an identified error that shifted consumers to a more favorable lending tier when the data furnisher corrected the inaccuracy. That said, Experian is not satisfied with this result and we continue to work toward ensuring credit reports are 100% accurate."
So, what should credit card customers and other American consumers do?
"Consumers should do everything they can with the bureau that is showing the errors and also petition the Consumer Financial Protection Bureau," said Jones, the consumer advocate. "It will take time to resolve this, because the bureaus are in denial."