A new government report has generated lots of news stories about widespread errors in credit reports. Most people might know that lenders use credit reports to assess a borrower's risk and, based on that, to set prices on loans. But less well known is that insurers, utilities and phone-service providers also use these reports to determine how much to charge consumers. Employers too use credit reports in background checks of prospective new hires.
Based on a sample of 1,001 consumers who are representative of U.S. households with credit histories, the Federal Trade Commission found that 1 in 4 participants identified at least one significant error in his or her credit report. The FTC says the error rate may in fact be higher, because their study was skewed by younger consumers, whose credit histories are shorter. Older adults have a greater number of credit accounts and, not surprisingly, a greater number of derogatory public records, including a higher frequency of bankruptcies -- all of which increase the potential for more credit report errors.
The FTC found that correcting credit report errors resulted in 13 percent of study participants getting a higher credit score. And for 5 percent of participants, a correction raised their score enough to move them into higher credit-score bracket, which qualifies them to pay less for a loan. Extrapolating that 5 percent to the 200 million Americans with a credit history means that 10 million Americans are paying more for loans than they should.
How much are these folks overpaying? The myFICO Loan Savings Calculator provides some idea. For example: The average amount financed on a new car is $26,000. The myFICO calculator shows that at today's interest rates, a borrower would save over $2,000 on a 48-month loan just by moving from a credit score of 650 to a 660. That same borrower would save $23,000 on the average 30-year fixed rate mortgage of $172,000.
Multiply these overpayments by 10 million consumers, and you get billions (trillions?) of dollars that consumers could be using for savings, education expenses, or spending that would speed our nation's economic recovery.
At least two other findings caught my eye:
- Credit reporting agencies partnered with the FTC to do the study and investigated errors flagged by participants within a few weeks. In real life, it's not so simple for most people. According to a New York Times story in 2011, the agencies keep lists of celebrities, journalists, politicians, judges and other VIPS, and handle complaints from these people quickly. Everyone else is relegated to an automated complaint-resolution system that often fails to work. (For the gory details on the agencies' complaint resolution, see this recent CBS 60 Minutes report or this 2009 study by the National Consumer Law Center.)
- The FTC hired counselors to help participants review their credit reports and identify errors. As a result, the FTC notes that "the dispute rate is relatively high." I take this to mean that the dispute rate for regular folks is too low. That's no surprise. Credit reports aren't very understandable (do you know what "tradelines" means?), and consumers usually get a less complete credit report than lenders do.
Last summer, the Consumer Financial Protection Bureau announced it would begin supervising larger credit reporting agencies and address some of the problems affecting consumers. This new FTC report will really help in that long overdue work.