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

Letter

Information on Frequency, Type, and Cause of Credit Report Errors Is Limited; Industry Data and Available Studies Disagree on Frequency of Errors

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.

Literature Raised Serious Questions Regarding Level of Credit Report Accuracy

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.

CRA and CDIA Data Indicate Consumer Disputes Rarely Identified Errors

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.”

Literature and Industry Data Have Serious Limitations

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.

Both Literature and Industry Identified Similar Types and Causes of Errors

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.

Industry Has Implemented Procedures to Ensure Data Consistency and Accuracy, but Efficacy of Procedures Not Known

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.

FTC Has Taken Enforcement Actions Related to the Accuracy of Credit Reports Since 1996 FCRA Amendments

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).

Impact of 1996 FCRA Amendments on Credit Report Accuracy and the Potential Effects of Errors on Consumers Is Not Fully Known

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.

Information on the Impact of FCRA Amendments on Credit Report Accuracy Was Not Available

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.

Errors May Result in Both Positive and Negative Impacts on Consumers

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.

Impact of Errors May Be Influenced by Other Factors in a Credit File

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.

Observations

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.

Contacts and Acknowledgement

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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