Are Mistakes Ruining Your Credit Report?

A long-awaited study on credit reporting accuracy was released Monday and is drawing lots of attention — and some industry ire. In the FTC study, which tracked 1,001 individuals as they reviewed 2,968 credit reports and tried to correct mistakes, one in five consumers reportedly found errors on their credit reports, some of which could affect their credit scores.

The release of the study coincided with a report on CBS News’ 60 Minutes, titled, “40 Million Mistakes: Is Your Credit Report Accurate?” The report instigated a heated response from the credit reporting industry that accused the program of “selectively hyp(ing) snippets” from the report to “sensationalize the issue.”

What does this mean: Should you be worried that your credit report contains serious errors? Or not?

Despite headlines and hype to the contrary, the findings don’t appear to be too far off from a finding in an early study by the Policy and Economic Research Council, often referred to as the “PERC study” by the credit reporting industry. That study found that just under one in five (19.2%) of the credit reports examined by consumers were found to contain potentially inaccurate information.

However, in the PERC study, almost half of those alleged errors related to inaccurate header information (incorrect name of employer or misspelled street name, etc.) — information they emphasize has absolutely no effect on credit scores. The FTC reported that errors in the data on header information comprised the third most common category of alleged mistakes in their study.

The FTC reports that four out of five consumers who filed disputes experienced some modification to their credit report. And the Consumer Data Industry Association, which represents the credit reporting industry, says that three out of four consumer disputes are handled within 14 days. Again, they are looking at slightly different things here, but overall it doesn’t paint a dismal picture.

Both the FTC and PERC studies tackled the issue of the seriousness of mistakes, and how they impact consumers’ credit scores (and by extension perhaps the cost of credit). The FTC report found that of the 211 reports with a score change, 62 reports (29% of reports with a score change) had a score increase of more than 25 points. That’s similar to the PERC study’s finding that only .93% of all the credit reports examined had one or more disputes that resulted in a credit score increase of 25 points or greater. That latter report also found that an average of .5% of reviewed credit reports had modifications resulting in a credit score increase that placed the consumer in a high credit score tier where they would have likely received more favorable terms (a lower interest rate, for example).

What Does No Investigation Mean?

The CDIA took umbrage with the statement in the “60 Minutes” piece that the credit reporting agencies are “not doing an investigation at all,” and points out that credit reporting agencies are required by law to investigate all disputes promptly. But that assertion can’t be completely dismissed, either. Whether an investigation takes place depends on whether you define the term in just a strictly legal sense.

What a consumer thinks an investigation should involve and what actually happens may be worlds part. (Or countries apart; the “60 Minutes” piece included credit reporting agency representatives from Chile and India.)

Most consumers probably think an investigation means someone is reading the information they send in about their dispute, and then contacting the source of that data to try to determine the truth. Instead, most credit report disputes are handled by an automated system, eOscar, where disputes are turned into codes and the process most often involves computers talking to each other, rather than individuals. Typically in that system whatever the “furnisher” (lender, court, collection agency, etc.) says is correct determines whether the information is changed or not.

The automated system can be very efficient and takes care of the majority of disputes just fine: The PERC study reported that 98% of consumers were satisfied with the dispute process.

But neither study delved into the dark world of credit report purgatory, where consumers whose credit reports don’t get fixed, due to identity theft, mixed files or lenders whose records are wrong.

Should You Fear Credit Report Mistakes?

Back to the question posed earlier: Should you be worried about serious mistakes in your credit reports?

Of course you should. Whether it’s 2%, 5% or 20% of reports that contain errors serious enough to create a problem, you’ll never know which camp you fall into unless you check your credit reports yourself. The Consumer Financial Protection Bureau recently reported that fewer than one in five consumers review their credit reports each year. Considering that everyone is entitled to at least one copy from each major agency each year, that’s pretty pathetic. Are the rest simply assuming things are OK, or perhaps too worried what they will find?

You won’t get your credit scores for free unless you are turned down or charged more for credit or insurance due to your credit score. But you can use a service like Credit.com’s Credit Report Card to get a free credit score once a month.

You’ll want to dispute credit report mistakes right away, and keep good records of the dispute process to maximize the chance that your problem will be resolved quickly.

If you’re reviewing your credit reports at least once a year and monitoring your credit scores regularly a shocking headline about credit reports won’t throw you for a loop because you’ll know exactly what that means for you.