Consumer Credit: Limited Information Exists on Extent of Credit Report Errors and Their Implications for Consumers
Published: 2003-07-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Accurate credit reports are critical to the credit process--for consumers attempting to obtain credit and to lending institutions making decisions about extending credit. In today's sophisticated and highly calibrated credit markets, credit report errors can have significant monetary implications to consumers and credit granters. In recognition of the importance of this issue, the Senate Committee on Banking, Housing, and Urban Affairs asked GAO to (1) provide information on the frequency, type, and cause of credit report errors, and (2) describe the impact of the 1996 amendments to the Fair Credit Reporting Act (FCRA) on credit report accuracy and potential implications of reporting errors for consumers.
section_title: What GAO Found
paragraphs: Information on the frequency, type, and cause of credit report errors is limited to the point that a comprehensive assessment of overall credit report accuracy using currently available information is not possible. Moreover, available literature and the credit reporting industry strongly disagree about the frequency of errors in consumer credit reports, and lack a common definition for "inaccuracy." The literature and industry do identify similar types of errors and similar causes of errors. Specifically, several officials and reports cited collection agencies and governmental agencies that provide information on bankruptcies, liens, collections, and other actions noted in public records as major sources of errors. Because credit report accuracy is essential to the business activities of consumer reporting agencies and credit granters, the credit industry has developed and implemented procedures to help ensure accuracy. However, no study has measured the extent to which these procedures have improved accuracy. While the Federal Trade Commission (FTC) tracks consumer complaints on FCRA violations, these data are not a reliable measure of credit report accuracy. Additionally, FTC has taken eight formal enforcement actions directly or indirectly related to credit report accuracy since Congress enacted the 1996 FCRA amendments. Neither the impact of the 1996 FCRA amendments on credit report accuracy nor the potential implications of errors for consumers is known. Specifically, because comprehensive or statistically valid data on credit report errors before and after the passage of the 1996 FCRA amendments have not been collected, GAO could not identify a trend associated with error rates. Industry officials and studies indicated that credit report errors could either help or hurt individual consumers depending on the nature of the error and the consumer's personal circumstances. To adequately assess the impact of errors in consumer reports would require access to the consumer's credit score and the ability to determine how changes in the score affected the decision to extend credit or the terms of the credit granted. Ultimately, a meaningful independent review in cooperation with the credit industry would be necessary to assess the frequency of errors and the implications of errors for individual consumers.

section_title: Letter
paragraphs: I appreciate the opportunity to provide this committee with information  on the accuracy of consumer credit reports. Accurate credit reports are  critical for all consumers attempting to obtain credit and for lending  institutions in making appropriate and timely decisions about extending  credit. Information from credit reports is used to compile credit scores,  which in turn are used as the basis for deciding whether to extend credit,  and for setting rates and terms for mortgages and other consumer loans.  Thus, inaccurate credit report data could have significant monetary  implications for individual consumers and credit granters in today’s  sophisticated and highly calibrated credit markets.
To help promote the accuracy, fairness, and privacy of personal  information assembled by consumer reporting agencies (CRAs), Congress  enacted the Fair Credit Reporting Act (FCRA) in 1970. Under FCRA, CRAs  must “follow reasonable procedures to assure maximum possible  accuracy” in credit reports. In 1996, amendments to FCRA expanded the  responsibilities of data furnishers, prohibiting them from knowingly  providing inaccurate consumer information to a CRA in certain  circumstances. Additionally, FCRA gave the Federal Trade Commission  (FTC or Commission) responsibility for enforcing compliance with the  act’s provisions—to the extent that this authority did not overlap the  authority of other financial regulators for specific institutions.
In a series of hearings this committee has recently held on FCRA issues,  questions concerning the accuracy of credit reports have surfaced. In  recognition of the importance of this issue, you asked us to provide the  committee with information on (1) the frequency, nature, and cause of  consumer credit report errors and (2) the impact of the 1996 FCRA  amendments on credit report accuracy and the potential implications of  credit reporting errors on consumers.
The information that we are providing is based on a review of the limited  literature on the subject, and on interviews and supporting documentation  obtained from the three major CRAs; the Consumer Data Industry  Association (CDIA), a trade association for the consumer reporting  agencies; the National Foundation for Credit Counseling (NFCC), a  national nonprofit credit counseling network; the Federal Trade  Commission (FTC); the Federal Reserve; and five data furnishers. While  we asked the three major CRAs to provide data on the frequency, type, and  cause of errors in credit reports, they told us that they did not have data  that would specifically respond to our request. The CRAs also told us that  they compete with each other on the basis of the accuracy and  completeness of their credit reports and were reluctant to provide us with  any data they considered proprietary. However, they did agree to provide  available information on consumer disputes to CDIA, their trade  association, which provided that data to us in aggregated form.  Consequently, we were unable to independently verify the accuracy of this  data. Except for this limitation, we conducted our work in accordance  with generally accepted government auditing standards from June through  July 2003.
In summary, we found that information contained in the literature and the  available industry data on the frequency, types, and causes of credit report  errors are limited. Moreover, there is a large variance in the frequency of  errors presented by the literature and industry data. Unfortunately, we  cannot determine a definitive level of credit report accuracy because of  the data limitations inherent to both the literature and industry data.  However, the literature and industry had identified similar types of errors  in credit reports, including the inclusion of incorrect information and the  exclusion or incomplete reporting of information. Additionally, the  literature and industry consensus was that the causes of errors included  consumers, data furnishers, and CRAs. However, several industry officials  and reports identified collection agencies and organizations providing  public records data—on actions such as bankruptcies, liens, and  collections—as being major sources of errors in credit reports. In an effort  to ensure accuracy of credit report data, the credit industry has developed  and implemented procedures that standardized the manner in which  information was collected and transmitted. The FTC tracks consumer  complaints regarding possible FCRA violations and has taken eight  enforcement actions as of July 24, 2003, directly or indirectly related to  credit report data accuracy since the passage of the 1996 FCRA  amendments.
We cannot readily determine the impact of the 1996 FCRA amendments on  credit report accuracy or the potential implications of credit report errors  on consumers. This is attributable to the lack of trend data available on  credit report errors. Specifically, no entity collects or maintains the  necessary data for such an assessment. Similarly, we could not determine  the potential implications for consumers of credit reporting errors due to  the lack of quality information on the frequency of errors. However,  industry officials and studies suggested that errors and inaccuracies in  credit reports have the potential to both help and hurt individual  consumers. Minor inaccuracies in a consumer’s credit file may not hurt a  consumer if that individual had a very good credit history. On the other  hand, errors or inaccuracies in the credit report of a consumer with a less  than perfect credit history could result in the denial of credit or an offer of  less favorable credit terms. So, the impact of any particular error or  inaccuracy in a credit report is dependent on the specific circumstances of  the consumer.
The lack of comprehensive information regarding the accuracy of credit  reports inhibits any meaningful discussion of what could or should be  done to improve credit report accuracy. Because of the importance of  accurate credit reports to our national credit system, it would be useful to  perform an independent assessment of the current level of accuracy of  credit reports. The assessment would then form the basis for a more  complete and productive discussion of the costs and benefits of making  changes to the current system of credit reporting to improve credit report  accuracy. Another option for improving the accuracy of credit reports  would be to create more opportunities for consumers to review credit  reports. When consumers see their credit reports, they have a chance to  identify errors and ask for corrections, thus helping to ensure greater  overall accuracy of consumer credit reports.
subsections: section_title: Information on Frequency, Type, and Cause of Credit Report Errors Is Limited; Industry Data and Available Studies Disagree on Frequency of Errors
paragraphs: Available studies and credit reporting industry data disagree on the extent  of errors in credit reports. The limited literature on credit report accuracy  indicated high rates of errors in credit report data. In contrast, the major  CRAs and CDIA stated that they did not track errors specifically but that  the data the credit industry maintained suggested much lower rates of  errors. Both the literature and the data provided by the credit industry had  serious limitations that restricted our ability to assess the overall level  credit reporting accuracy. Yet, all of the studies identified similar types  and causes of errors. While data provided by the credit industry did not  address type and cause of errors, representatives from the three major  CRAs and CDIA cited types and causes similar to those cited in the  literature. The credit industry has developed and implemented procedures  to help ensure accuracy of credit report data, although no one has  assessed the efficacy of these procedures. Moreover, FTC tracks  consumer disputes regarding the accuracy of information in credit reports  and has taken eight enforcement actions directly or indirectly involving  credit report accuracy since 1996.
subsections: section_title: Literature Raised Serious Questions Regarding Level of Credit Report Accuracy
paragraphs: We identified three studies completed after the 1996 FCRA amendments  that directly addressed credit report accuracy, and one that indirectly  addressed the topic. One of these reports, published in December 2002 by  Consumer Federation of America, presents the frequency and types of  errors drawn from files requested by mortgage lenders on behalf of  consumers actively seeking mortgages. The Consumer Federation of  America initially reviewed 1,704 credit files representing consumers from  22 states and subsequently re-examined a sample of 51 three-agency  merged files. In this sample of merged files, the study found wide variation  in the information maintained by the CRAs, and that errors of omission  were common in credit reports. For example, the report stated that about:    78 percent of credit files omitted a revolving account in good standing;    33 percent of credit files were missing a mortgage account that had    67 percent of credit files omitted other types of installment accounts  that had never been late;    82 percent of the credit files had inconsistencies regarding the balance  on revolving accounts or collections; and   96 percent of the credit files had inconsistencies regarding an account’s  credit limit.
A March 1998 U.S. Public Interest Research Group (U.S. PIRG) study  found similar frequencies of errors in 133 credit files representing 88  individual consumers. U.S. PIRG reported that 70 percent of the files  reviewed contained some form of error. The errors ranged in severity from  those unlikely to have negative repercussions to those likely to cause a  denial of credit. For example, the report found:    41 percent of the credit files contained personal identifying information  that was long-outdated, belonged to someone else, was misspelled, or  was otherwise incorrect;   29 percent of the credit files contained an error—accounts incorrectly  marked as delinquent, credit accounts that belonged to someone else,  or public records or judgments that belonged to someone else—that  U.S. PIRG stated could possibly result in a denial of credit; and   20 percent of the credit files were missing a major credit card account,  loan, mortgage, or other account that demonstrated the  creditworthiness of the consumer.
Similar to the U.S. PIRG study, a 2000 survey conducted by Consumers  Union and published by Consumer Reports asked 25 Consumers Union  staffers and their family members to apply for their credit reports and then  review them. In all, Consumers Union staff and family members received  and evaluated 63 credit reports and in more than half of the reports, they  found inaccuracies that they reported as having the potential to derail a  loan or deflect an offer for the lowest-interest credit card. The  inaccuracies identified were similar to those reported by the Consumer  Federation of America and U.S. PIRG—inclusion of information belonging  to other consumers, inappropriately attributed debts, inaccurate  demographic information, and inconsistencies between the credit reports  provided by the three major CRAs regarding the same consumer.
While not specifically assessing the accuracy of credit reports, a Federal  Reserve Bulletin article found that credit reports contained  inconsistencies and cited certain types of data furnishers, including  collection agencies and public entities, as a primary source for some of the  inconsistencies found. Among the study’s findings:    Approximately 70 percent of the consumers in the study’s sample had a  missing credit limit on one or more of their revolving accounts,   Approximately 8 percent of all accounts showed positive balances but  were not up to date,   Between 1 and 2 percent of the files were supplied by creditors that  reported negative information only, and   Public records inconsistently reported actions such as bankruptcies  and collections.
An important aspect of the Federal Reserve study was that it used a  statistically valid and representative sample of credit reports, and received  access to this sample with the cooperation of one of the three major CRAs.  However, because the sample came from one CRA only, the findings of the  study may not be representative of other CRAs.
section_title: CRA and CDIA Data Indicate Consumer Disputes Rarely Identified Errors
paragraphs: Representatives of the three major CRAs and CDIA told us that they do not  maintain data on the frequency of errors in credit reports. However, the  industry does maintain data that suggest errors are infrequent in cases of  an adverse action. CDIA stated that the three major CRAs provided or  disclosed approximately 16 million credit reports, out of approximately 2  billion reports sold annually in the marketplace. According to CDIA data,  84 percent of the disclosures followed an adverse action and only 5  percent of disclosures went to people who requested their reports out of  curiosity. Out of these disclosures, CRA officials stated that an extremely  small percentage of people identified an error.
An Arthur Andersen study, conducted in 1992, found a similar infrequent  rate of errors arising from adverse actions. Under commission by the  Associated Credit Bureaus (now CDIA), the study reportedly found that  only 36 consumers—out of a sample of 15,703 people denied credit— disputed erroneous information that resulted in a reversal of the original  negative credit decision. Similarly, in an attempt to respond to our data  request, CDIA produced data gathered by a reseller over a two-week  period that indicated that out of 189 mortgage consumers, only 2  consumers (1 percent) had a report that contained an inaccuracy. In our  conversation with data furnishers, we discovered that two conduct  internal audits on the accuracy of the information they provide to the  CRAs. These data furnishers indicated that the information they provide  and the CRAs maintain is accurate 99.8 percent of the time.
While consumer disputes do not provide a reliable measure of credit  report accuracy, CRA representatives told us that disputes provide an  indicator of what people perceive as errors when reviewing their credit  files. A CDIA official stated that five types of disputes comprise about 90  percent of all consumer disputes received by the three major CRAs. These  five dispute types are described as:    Claims account has been closed;    Dispute present or previous account status, payment history, or    Dispute related to disposition of account included in or excluded from    Not my account.
Although CDIA could not provide a definitive ranking for all five types of  disputes, it did state that “not my account” was the most frequently  received dispute. After receiving a consumer’s dispute, FCRA requires a  CRA to conduct a reinvestigation. The purpose of reinvestigation is to  either verify the accuracy of the disputed information, or to confirm and  remove an error.
CDIA provided data on the disposition of dispute reinvestigations by  categories of those received by the three major CRAs in 2002. CRA  officials explained that the data represents the first 3 quarters of 2002, and  that each CRA reported data on a different quarter. CDIA declined to  provide the total number of consumer disputes. Table 1 shows the  frequency of these four disposition categories. Specifically, the table  indicates that over half of all disputes required the CRA to modify a credit  report in some way, though not necessarily to remove an error.
It is important to emphasize that not every dispute leads to identifying an  error. Indeed, many disputes, as the table indicates, resulted in a  verification of accuracy or an update of existing information. Additionally,  CRA and CDIA representatives stated that many disputes resulted in the  CRA clarifying or explaining why a piece of information was included in  the credit report. For example, if recently married consumers obtained a  copy of their files, they might not see their married names on file. In such  cases, the files still accurately reflected the most current information  provided to the CRA, but the consumer may have perceived the less-than- current information as an error while the CRA would not. The CRA  representative cited another example of a consumer seeing an account  listed with a creditor he or she did not recognize. However, the account in  question was with a retailer that subsequently outsourced its lending to  another company. In this case, the information was correct but the  consumer was not aware of the outsourcing. One CRA representative  indicated that over 50 percent of the calls they received resulted in what  they consider “consumer education.”
section_title: Literature and Industry Data Have Serious Limitations
paragraphs: We cannot determine the frequency of errors in credit reports based on  the Consumer Federation of America, U.S. PIRG, and Consumers Union  studies. Two of the studies did not use a statistically representative  methodology because they examined only the credit files of their  employees who verified the accuracy of the information, and it was not  clear if the sampling methodology in the third study was statistically  projectable. Moreover, all three studies counted any inaccuracy as an  error regardless of the potential impact. Similarly, the studies used varying  definitions in identifying errors, and provided sometimes obscure  explanations of how they carried out their work. Because of this, the  findings may not represent the total population of credit reports  maintained by the CRAs. Moreover, none of these groups developed their  findings in consultation with members of the credit reporting industry,  who, according to a CDIA representative, could have verified or refuted  some of the claimed errors.
Beyond these limitations, a CDIA official stated that these studies  misrepresented the frequency of errors because they assessed missing  information as an error. According to CRA officials errors of omission may  be mitigated in certain instances because certain lenders tend to use  merged credit report files in making lending decisions, such as mortgage  lenders and increasingly credit card lenders. CRA officials explained that  while complete and current data are necessary for a wholly accurate credit  file, both are not always available to them. For instance, credit-reporting  cycles, which dictate when CRAs receive data updates from data  furnishers, may affect the timeliness of data. CRAs rely on these updates,  which may come daily, weekly, or monthly depending on the data  furnisher’s reporting cycle. If a data furnisher provided information on a  monthly basis there would be a lag between a consumer’s payment, for  example, and the change in credit file information. Likewise, if a data  furnisher reported to one CRA but not to another, the two reports would  differ in content and could produce different credit scores. It is important  to note that reporting information to the CRAs is voluntary on the part of  data furnishers. While the Federal Reserve Bulletin article noted  inconsistencies as an area of concern, it recognized that all credit reports  would not contain identical information.
Along with misrepresenting error frequency by counting omitted  information, industry officials believed that the literature misrepresented  the frequency of errors because the literature defined errors differently  than the credit industry. The CRAs and CDIA stated that they consider  only those errors that could have a meaningful impact on a person’s credit  worthiness as real errors. This distinction is critical to assessing accuracy,  as, according to the CDIA, a mistake in a consumer’s name might literally  be an inaccuracy, but may ultimately have no impact on the consumer.
The data provided by CDIA and the CRAs have serious limitations as well.  For example, neither CDIA nor CRA officials provided an explanation of  the methodology for the collection of data provided by CDIA and for the  assessments cited by the CRAs. Moreover, because these data related  primarily to those errors that consumers disputed after an adverse action,  they excluded a potentially large population of errors. Specifically, these  data excluded errors that would cause a credit grantor to offer less  favorable terms on a loan rather than deny the loan application. The data  also excluded errors in cases where consumers were not necessarily  seeking a loan and therefore did not have a need to review their credit  reports. Additionally, as stated earlier, only a small percentage of  consumers requested credit reports simply out of curiosity. While the  CDIA representatives felt that these data were useful for assessing a level  of accuracy, they agreed that by focusing on these data only, the industry  did not consider a potentially large set of errors.
section_title: Both Literature and Industry Identified Similar Types and Causes of Errors
paragraphs: While both the literature and credit industry representatives cited similar  types and causes of errors, neither the literature nor the credit industry  data identified one particular type or cause of error as the most common.  All respondents stated that error type could range from wrong names and  incorrect addresses to inaccurate account balances and erroneous  information from public records.
Based on the literature we reviewed and on our discussions with CRA and  data furnisher officials, we could not identify any one cause or source  most responsible for errors. However, the Consumer Federation 2002  study, the Federal Reserve Bulletin article, and a representative from the  National Foundation for Credit Counseling stated they felt data furnishers  often caused more errors than did CRAs or consumers. According to  several respondents, this was particularly true for data furnishers, such as  collection agencies and public entities that did not rely on accurate credit  reports for lending decisions. For example, while a bank needs accurate  information in assessing lending risk, and thus attempts to report accurate  information, a collection agency does not rely on credit reports for  business decisions, and therefore has less of an incentive to report fully  accurate information. Data furnishers told us that they did not consider  CRAs as a significant cause of errors, but stated that difficulty in matching  consumer identification information might cause some errors. Data  furnishers also stated that the quality control efforts among data  furnishers might vary due to the extent of data integrity procedures in  place. They explained that some smaller data furnishers might not have  sophisticated quality control procedures because implementing such a  system was expensive.
On the other hand, errors might occur at any step in the credit reporting  process. Consumers could provide inaccurate names or addresses to a  data furnisher. A data furnisher might introduce inaccuracies while  processing information, performing data entry, or passing information on  to the CRAs. And, CRAs might process data erroneously. Figure 1 shows  some common causes for errors that might occur during the credit  reporting process.
CRAs and data furnishers also cited other causes of errors. For example,  collection agencies and public records on bankruptcies, tax liens, and  judgments were cited as major sources of errors. CRA officials and data  furnishers said the growing number of fraudulent credit “repair” clinics  that coach consumers to make frivolous reinvestigation requests in an  effort to get accurate, though negative, information off the credit report  also might cause errors, as disputed information a CRA cannot verify  within 30 days is deleted from the consumer’s credit report. File  segregation, a tactic in which a consumer with a negative credit history  tries to create a new credit file by applying for credit using consistent but  inaccurate information, was another reported cause for inaccurate credit  data.
section_title: Industry Has Implemented Procedures to Ensure Data Consistency and Accuracy, but Efficacy of Procedures Not Known
paragraphs: The credit industry has been working on systems to help ensure accuracy  since the “reasonable procedures” standard took effect under FCRA in  1970. Within the last decade, CDIA has led efforts to implement industry  systems and processes to increase the accuracy of credit reports. In  commenting upon accuracy, representatives from CDIA, the CRAs, the  Federal Reserve, and the data furnishers stated that credit score models  were highly calibrated and accurate and, on the aggregate level, credit  reports and scores were highly predictive of credit risk.
During the 1970s, the Associated Credit Bureaus (now CDIA) attempted to  increase report accuracy by introducing Metro 1, a method of  standardizing report formats. The goals of Metro 1 were to create  consistency in reporting rules and impose a data template on the industry.  In conjunction with the industry, in 1996 CDIA created Metro 2, an  enhancement of the Metro 1 format that enables a finer distinction for  reporting information. For example, Metro 2 allowed CDIA to implement  an “Active Military Code” to protect the credit reports of troops serving  overseas. Since active military personnel are legally entitled to longer  periods to make credit payments without penalty, this new code ensured  that data furnishers did not incorrectly report accounts as delinquent.
While use of the Metro format is voluntary, CRAs currently receive over 99  percent of the volume of credit data—30,000 furnishers providing a total of  2 billion records per month—in either Metro 1 or Metro 2 format, with  over 50 percent sent in Metro 2. One data furnisher who recently switched  from Metro 1 to Metro 2 found that data accuracy improved overall as  evidenced by the reduction in the number of data rejections by the CRAs  and dispute data. Those data furnishers that do not use the Metro formats  provide data on compact disc, diskette, tape, or other type of electronic  media. While use of standardized reporting formats ensures more  consistent reporting of information, because the industry has never  conducted a study to set a baseline level of error frequency in credit  reports, and does not currently collect such data, no one knows the extent  to which these systems have improved accuracy in credit reports.
section_title: FTC Has Taken Enforcement Actions Related to the Accuracy of Credit Reports Since 1996 FCRA Amendments
paragraphs: FTC has taken eight formal enforcement actions since the passage of the  1996 FCRA amendments against CRAs, data furnishers, and resellers that  directly or indirectly relate to credit report accuracy. FTC receives and  tracks FCRA complaint data against CRAs by violation type and uses this  data to identify areas that may warrant an enforcement action. While these  data cannot provide the number of violations or frequency of errors in  credit reports, since each complaint does not necessarily correspond to a  violation, they can give a sense of the relative frequency of complaints  surrounding CRAs. We discuss complaint data in more detail in the next  section.
According to FTC staff, accuracy in the context of FCRA means more than  the requirement that CRAs establish “reasonable procedures to assure  maximum possible accuracy of their reports.” They explained that the  statute also seeks to improve accuracy of credit reports by a “self-help”  process in which the different participants comply with duties imposed by  FCRA. First, creditors and others that furnish information are responsible  for accuracy. Second, credit bureaus must take reasonable steps to ensure  accuracy. Finally, users of credit reports must notify consumers (provide  adverse action notices) about denials of a loan, insurance, job, or other  services because of something in their credit report. FTC staff stated that  it is crucial that consumers receive adverse action notices so that they can  obtain their credit reports and dispute any inaccurate information. For  that reason, the Commission has made enforcement in this area a priority.
FTC staff stated that their primary enforcement mechanism is to pursue  action against a CRA or data furnisher that showed a pattern of repeated  violations of the law identified through consumer complaints. According  to FTC staff, the Commission has taken eight enforcement actions against  CRAs, furnishers, or lenders, since 1996 that directly or indirectly  addressed credit report accuracy. One case pertained to a furnisher  providing inaccurate information to a CRA, two cases pertained to a  furnisher or CRA failing to investigate a consumer dispute, and two  actions were taken against lenders that did not provide adverse action  notices as required by statute. The remaining three cases were against the  major CRAs for blocking consumer calls and having excessive hold times  for consumers calling to dispute information on their credit reports. In  addition to enforcing FCRA, FTC also provides consumer educational  materials and advises consumers on their rights (such as the right to sue a  CRA or data furnisher for damages and recoup legal expenses).
section_title: Impact of 1996 FCRA Amendments on Credit Report Accuracy and the Potential Effects of Errors on Consumers Is Not Fully Known
paragraphs: To date, no comprehensive assessments have addressed the impact of the  1996 FCRA credit report accuracy amendments or the potential effects  inaccuracies have had on consumers. In addition, because it has not  conducted surveys, FTC was not able to provide overall trend data on the  frequency of errors in credit reports. Industry officials as well as two  studies we reviewed suggest that errors and inaccuracies in credit reports  have the potential to both help and hurt individual consumers, while in  some instances errors or inaccuracies may have no effect on the  consumer’s credit score. The impact of any particular error or inaccuracy  in a particular credit report will be dependent on the unique and specific  circumstances of the consumer.
subsections: section_title: Information on the Impact of FCRA Amendments on Credit Report Accuracy Was Not Available
paragraphs: Data on the impact of the 1996 FCRA amendments on credit report  accuracy was not available. For instance, we could not identify impact  information from the literature we reviewed and industry officials with  whom we spoke said they did not collect such data. Furthermore, FTC  could not provide overall trend data but did provide FCRA-related  consumer complaint data involving CRAs.
FTC staff could not say what the trend in the frequency of errors in credit  reports has been since the 1996 amendments because that data is not  available. However, FTC officials provided consumer complaint data that  shows from 1997 through 2002, the number of FCRA complaints involving  CRAs received annually by FTC increased from 1,300 to almost 12,000. The  most common complaints cited against CRAs in 2002 pertained to the  violations are listed below:    Provided inaccurate information (5,956 complaints);    Failed to reinvestigate disputed information (2,300 complaints);    Provided inadequate phone help (1,291 complaints);    Disclosed incomplete/improper credit file to customer (1,033  Improperly conducted reinvestigation of disputed item (771  complaints).
Consumer complaint data involving CRAs and FCRA provisions represent  3.1 percent of the total complaints FTC received directly from consumers  on all matters in 2002. The FTC staff explained that their knowledge was  limited to complaints that came into the agency and that they did not  conduct general examinations or evaluations that would enable them to  project trends. FTC staff cautioned that it would not be appropriate to  conclude that since the complaints against CRAs were on the rise,  accuracy of credit reports was deteriorating. They stated that the increase  in the number of complaints could be due to greater consumer awareness  of FTC’s role with respect to credit reporting, as well as a general trend  towards increased consumer awareness of credit reporting and scoring.
section_title: Errors May Result in Both Positive and Negative Impacts on Consumers
paragraphs: CRAs and the literature suggest that credit-reporting errors could have  both a positive and negative effect on consumers. One CRA stated that  errors occur randomly and may result in either an increase, decrease, or  no change in a credit score. Another CRA stated that information  erroneously omitted from a credit report such as a delinquency, judgment,  or bankruptcy filing would tend to raise a credit score while that same  information erroneously posted to the report would tend to lower the  score. The Consumer Federation of America study cited earlier also  analyzed 258 files to determine whether inconsistencies were likely to  raise or lower credit scores. In approximately half the files reviewed (146  files, or 57 percent), the study could not clearly identify whether  inconsistencies in credit reports were resulting in a higher or lower score.  The study determined that in the remaining 112 files there was an even  split between files that would result in a higher or lower score. The  Federal Reserve Bulletin article previously mentioned also concluded that  limitations in consumer reporting agency records have the potential to  both help and hurt individual consumers. The article further stated that  consumers who were hurt by ambiguities, duplications, and omissions in  their files had an incentive to correct them, but consumers who were  helped by such problems did not.
section_title: Impact of Errors May Be Influenced by Other Factors in a Credit File
paragraphs: Industry officials and the literature we reviewed suggested that the impact  of an error in a consumer’s credit report was dependent on the specific  circumstance of the information contained in a credit file. CRA and data  furnisher officials further pointed out that a variety of factors such as  those identified by Fair Isaac, a private software firm that produces credit  score models, might impact a credit score. According to the Fair Isaac  Web site, their credit score model considers five main categories of  information along with their general level of importance to arrive at a  score. These categories and their respective weights in determining a  credit score include payment history (35 percent), amounts owed (30  percent), length of credit history (15 percent), types of credit in use (10  percent) and new credit (10 percent). As such, no one piece of information  or factor alone determines a credit score. For one person, a given factor  might be more important than for someone else with a different credit  history. In addition, as the information in a credit report changes, so does  the importance of any factor in determining a credit score. Fully  understanding the impact of errors on consumer’s credit scores would  require access to consumer credit reports, discussions with consumers to  identify errors, and discussions with data furnishers to determine what  impact, if any, correction of errors might have on decisions made based on  the content of a credit report.
section_title: Observations
paragraphs: The lack of comprehensive information regarding the accuracy of  consumer credit reports inhibits any meaningful discussion of what more  could or should be done to improve credit report accuracy. Available  studies suggest that accuracy could be a problem, but no study has been  performed that is representative of the universe of credit reports.  Furthermore, any such study would entail the cooperation of the CRAs  data furnishers, and consumers to fully assess the impact of errors on  credit scores and underwriting decisions. Because of the importance of  accurate credit reports to the fairness of our national credit system, it  would be useful to perform an independent assessment of the accuracy of  credit reports. Such an assessment could be conducted by FTC or paid for  by the industry. The assessment would then form the basis for a more  complete and productive discussion of the costs and benefits of making  changes to the current system of credit reporting to improve credit report  accuracy.
Another option for improving the accuracy of credit reports would be to  create the opportunity for more reviews of credit reports by consumers.  One way this could be accomplished would be to expand the definition of  what constitutes an adverse action. Currently, consumers are only entitled  to receive a free copy of their credit reports when they receive adverse  action notices for credit denials or if they believe that they have been the  victim of identity theft. When consumers see their credit reports, they have  a chance to identify errors and ask for corrections to ensure the accuracy  of their credit reports. Expanding the criteria for adverse actions to  include loan offers with less than the most favorable rates and terms  would likely increase the review of credit files by consumers. Such added  review of credit files would in all likelihood help to further ensure the  overall accuracy of consumer credit reports. However, the associated  costs to the industry would also need to be considered against the  anticipated benefits of increasing consumer access to credit reports.
section_title: Contacts and Acknowledgement
paragraphs: For further information regarding this testimony, please contact Harry  Medina at (415) 904-2000. Individuals making key contributions to this  statement include Janet Fong, Jeff R. Pokras, Mitchell B. Rachlis, and  Peter E. Rumble.
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