10 things credit bureaus won’t say

10 things credit bureaus won’t say

They’ve got your number. And they’re not afraid to use it

By AnnaMaria Andriotis

Dave Whamond

1. “We track a lot more than just your credit.”

Credit bureaus are well known for tracking consumers’ credit history, including tabulating such details as whether they pay their bills on time and how much debt they carry. And as evidenced by the recent case of Julie Miller, who was awarded $18 million after she sued Equifax — one of the three main credit reporting bureaus — for failing to correct major mistakes in her credit report, the information they compile can sometimes be riddled with errors.

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But the bureaus also maintain information that has nothing to do with credit, from consumers’ home addresses to their employment records. While that data isn’t used to calculate credit scores, lenders can access this personal information and use it to help evaluate borrowers who are applying for credit — even to justify denying them a loan altogether. Individuals who change addresses often, for instance, may be presumed less financially stable and harder to track down if unpaid debts ever need to be collected, says Louis Hyman, a consumer-credit historian and assistant professor at Cornell University. Similarly, those who change jobs every few months could be viewed as more likely to miss payments, he says.
The credit bureau industry says it needs this identifying information to develop accurate credit report databases. Norm Magnuson, a spokesman for the Consumer Data Industry Association, which represents credit bureaus, says storing consumers’ addresses helps bureaus identify the correct credit report to give lenders when a consumer applies for credit. (Questions to the three main bureaus about industry practices were directed to the CDIA.) Social Security numbers by themselves often won’t suffice, he says, because some consumers apply for credit without providing that information. He says the CDIA cannot speak to such lender underwriting practices though they are regulated by laws that protect consumers.
Consumers’ salary information can also be up for grabs. Equifax, one of the three national credit bureaus, maintains a private database of salary records on more than 33% of U.S. adults — information it acquired when it purchased a data-mining company in 2007 — and it can sell this data to eligible lenders, including mortgage and car finance companies, that are trying to gauge a consumer’s ability to repay a loan. This year, seven members of Congress sent a letter to Equifax asking for proof that its subsidiary isn’t breaking laws that protect personal privacy. (The other two major bureaus, Experian and TransUnion, say they don’t collect salary information.)
Timothy Klein, a spokesman for Equifax, says the company provides salary information only when permissible under the Fair Credit Reporting Act, which went into effect in 1970 and regulates how consumer information can be distributed. A company statement to congressional members stated that it’s in “compliance with all applicable consumer protection laws.” Also, he says, the company will only provide this data to lenders if the consumers first agree to it.
Lenders have to ask consumers for permission to verify their employment or income, typically by including language authorizing that disclosure in the loan application, says Klein. If the consumer declines, he says, it’s up to the lender to determine whether to offer a loan without income information.
2. “Selling your secrets is how we make our money.”
Each of the three major credit bureaus, Equifax, Experian andTransUnion, maintains more than 200 million files on consumers, according to the Consumer Financial Protection Bureau — tracking about 63% of the U.S. population. And the bureaus sell some of that information to lenders. Selling data is a primary revenue source for the credit bureau industry, which had U.S. revenue of about $4 billion in 2011, according to the CFPB. Bureaus also sell data to other companies, including insurers and debt collectors, as well as to consumers, says John Ulzheimer, president of consumer education at SmartCredit.com, a credit-monitoring site.

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That’s largely how credit card solicitations end up in consumers’ mailboxes. Card issuers pay credit bureaus for the contact information of individuals who meet specific criteria, like a certain minimum credit score. Similarly, mortgage lenders pay bureaus for a list of consumers within a specific credit score bracket and mortgage balance so that they can contact them with refinancing offers. Nessa Feddis, senior vice president with the American Bankers Association, says the process helps lenders find customers who are likely to be interested in and qualified for the loans they’re offering.
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Lenders also pay the bureaus for updates on existing customers: Some card issuers will pull credit scores on their cardholders to determine if they’ve become riskier, says Ulzheimer. They can use a lower credit score as a basis for cutting a customer’s credit line or increasing their interest rate on new purchases, he says. (They can also check to see if their customers have become less risky, in which case they can make more credit available.) Feddis, of the ABA, says every transaction on a credit card represents a new loan, so lenders check on their customers to make sure they’re still eligible for revolving credit and likely to be able to repay the loan.
To be sure, the Fair Credit Reporting Act states that credit bureaus can provide consumers’ information to companies that plan to make a firm offer of credit. Magnuson of the CDIA says the credit bureaus are careful about who has access to their systems, and they vet the lenders’ intended uses of credit reports. He adds that consumers can benefit from this dissemination, because they stand to receive loan offers that are less expensive than what they may currently have. Individuals who’d like to avoid solicitations can remove their name from the lists that credit bureaus sell by visiting OptOutPrescreen.com.
3. “What we know could cost you a new job.”

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Blemishes on a credit report don’t just make it tougher to get a loan — they can also make it more difficult to get a job. Federal law permits employers to pull job applicants’ credit reports and to use the information within them as grounds for not hiring someone. In fact, roughly 47% of employers say they pull credit reports on some or all job applicants, according to the Society for Human Resource Management. If a credit background check reveals negative information, employers say, certain credit problems, such as outstanding judgments, accounts in debt collection and bankruptcy, are most likely to make them decide not to extend a job offer, according to a separate SHRM survey. The assumption is that a bad credit report might indicate poor work habits and decision-making.
Opponents of the practice question whether there’s a connection between a poor credit file and work performance. “Things that might make you have bad credit have nothing to do with whether you’re a liability,” says Hyman.
Job applicants have to be informed if their credit report will be reviewed. (At least seven states prohibit companies from conducting credit checks on many job applicants.) Under the Fair Credit Reporting Act, which regulates how consumer credit information is handled, companies must get permission from applicants in writing to check their credit reports. While applicants can deny the employer permission, they might want to consider instead explaining the circumstances that led to their credit problems, says Ulzheimer, since that may improve their chance of getting the job.
4. “Good thing no one’s reporting on our mistakes. Oh, wait.”
When errors appear in credit reports, the impact on those borrowers can be severe. Negative information, like missed payments or a foreclosure, can send the borrower’s credit score (which is calculated based on the details in the credit report) into a tailspin. That, in turn, will make it harder to get approved for credit, increase the chances of ending up with higher interest rates on loans, and even make it tougher to rent an apartment (many landlords check consumer credit) or, again, get a job.

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This month, the Federal Trade Commission released a study showing that one in five consumers has an error in at least one of their three credit reports. Some 13% of consumers had credit report errors that impacted their credit scores, while 5% had errors that could lead to paying more or being denied credit.
A variety of mishaps can lead to errors — most of which consumers have no involvement in. That includes cases of identity theft and instances when creditors identify the wrong person as owning debt, like the account holder’s spouse, according to testimony by the National Consumer Law Center at a Senate hearing in December. That same month, a report by the CFPB found that almost 40% of consumers’ disputes relate to debt collections.
The credit bureau industry, however, says the FTC data confirms that few errors of consequence occur. The CDIA’s Magnuson says the bureaus work with lenders to reduce errors, and that in most cases, consumers aren’t disputing that an account is theirs but rather have an issue with how their lender is reporting an account, such as the balance or whether they missed a payment.
5. “You all look so much alike…”
When consumers order their credit reports, they have to provide their full name, Social Security number, date of birth and address. But credit bureaus often use fewer pieces of information to match account activity — like a report from a lender that a person has applied for a new line of credit — to borrowers’ credit reports. In many cases, they’ll only use seven out of the nine digits of the borrower’s Social Security number, says Chi Chi Wu, a staff attorney with the National Consumer Law Center, a nonprofit focused on consumer advocacy.

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This practice becomes problematic when people have similar names and Social Security numbers, because it can lead to “mixed credit profiles,” when credit information relating to one consumer is placed in someone else’s file (also the main issue behind the $18 million lawsuit filed against Equifax). Critics claim the bureaus have been aware of this issue for years. In the 1990s, the FTC began requiring the bureaus to take better steps to prevent mixed files. But mixed files are an ongoing problem, says Ulzheimer. This includes “ownership” disputes, like when a debt collector attributes an account to the wrong borrower. In the last three months of 2011, 33% of credit disputes related to claims by a consumer that an account in their file did not belong to them, either because of an error or identity theft, according to the CFPB.
If the erroneously-applied information in the credit report is negative, of course, that will result in a lower credit score for the person whose actual name is on that file. “It’s one of the worst types of errors that can occur,” says Wu.
Magnuson says the credit bureaus are careful in matching data. He adds that a 100% match wouldn’t solve such concerns and says it would force bureaus to omit account activity from credit reports whenever there’s a small mistake in, say, the last two digits of a Social Security number, even if most of the identifying information is correct.
6. “… it’s tough to tell you apart from someone pretending to be you.”
In many cases, consumers only find out they’re victims of identity theft when they pull up their credit report and spot a fraudulent account, says Jay Foley, partner at identity-theft consulting firm ID Theft Info Source. In fact, identity theft is a cause of credit disputes, according to the CFPB.
While lenders have mechanisms in place to stop identity thieves, they’re not always successful. In those cases, when thieves apply for credit under a consumer’s name, the lender pulls that unsuspecting person’s credit report, tells the credit bureaus to add the loan account to that report, and then communicates missed payments to the bureaus, tarnishing the credit score tied to that account. Then, when consumers find out they’ve been a victim of identity theft — rather than the burden of proof being on the credit agency or lender — they have to provide the credit bureaus with evidence of their innocence.

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Consumer advocates say the credit bureaus share some of the blame for these cases. Wu, of the NCLC, says the bureaus’ loose matching procedures contributes to identity theft problems. If bureaus matched all the information, including the person’s full name and full Social Security number, fewer identity thefts would occur, she says. The credit bureau industry disagrees, saying that the duty to verify someone’s identity is with the lender. The CDIA’s Magnuson says that credit bureaus have identity verification systems to protect consumers and that bureaus’ databases are not the entry point for identity theft or the sole source for its prevention.
Consumers can take some steps to avoid becoming victims of identity theft. For instance, they can place fraud alerts on their credit reports for free by contacting the credit bureaus. Lenders will then have to try to verify an applicant’s identity before issuing credit. Many banks also sell identity-theft services — costs can run $10 or more a month — that mostly involve daily credit monitoring, including flagging new accounts opened in a consumer’s name and sending alerts to that individual.
Consumers who learn a fraudulent account has been opened in their name should consider filing a police report and sending a letter with a copy of that report to the credit bureau and the lender who approved that account. In such cases, lenders will usually get fraudulent accounts removed from a credit report within 90 days, says Foley.
7. “Your ‘credit dispute’ doesn’t quite capture our attention.”
Credit bureaus recommend that consumers check their credit reports at least once a year (they can do this for free at annualcreditreport.com) and file a dispute if they notice any errors. But consumer advocates contend that the dispute system is broken. No matter how many papers and other documentation consumers submit to the bureaus, the bureau will apply a two- or three-digit code that offers a brief summary of the dispute, such as “not his/hers” or “disputes amounts,” according to the NCLC. The bureaus will send that code and a one-page form to the creditor involved in the dispute. “We’ve seen [court] cases where the consumer attached canceled checks, letters from [lenders], and court judgments saying this is wrong and none of that gets sent,” says Wu. (The CDIA says it’s in the early testing stages of sending consumers’ documentation to lenders.)

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A CFPB report released in December found that the bureaus resolve an average of only 15% of consumer disputes internally, while the remaining 85% are passed on to the lenders or creditors. It added that “the documentation consumers mail in to support their cases may not be getting passed on to the data furnishers for them to properly investigate.”
Magnuson of the CDIA says that lenders are the most qualified to respond to questions of accuracy and that the dispute system is designed to “quickly and accurately deal with consumer disputes, which is what consumers want.” He says the bureaus serve as a point of contact for consumers and act as a clearinghouse for access to lenders who will make the final determination.
But experts say when lenders are forwarded consumers’ discrepancy claims, some will just review their own records with the bureau’s to make sure they match — though both could be wrong. Wu says lenders will use this as a basis to reject the consumer’s claim. The American Bankers Association says lenders conduct investigations but that how deep they go depends on the nature of the consumer’s dispute.
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8. “But bypass us on a dispute, and it’ll cost you.”

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If consumers believe a credit bureau wrongly dismissed their dispute, they have the right to take the case to court based on the Fair Credit Reporting Act. But if consumers bypass the bureaus and contact the lender with their dispute, they won’t have the right to go to court if that lender claims there’s no error. The CDIA says that while writing the law, Congress recognized that exposing lenders to such lawsuits could result in an unintended consequence: Lenders might stop providing credit-related data about consumers to credit bureaus, which in turn would harm consumers whose reports and scores wouldn’t reflect that they pay their bills on time and are in good credit standing.
Ulzheimer says the law leaves consumers in a difficult spot but recommends that they stick to dealing with the bureaus so that they don’t give up their legal right to a court case should they need it. He suggests they keep all their communications with the bureaus in writing and make copies of all the letters they receive and documentation they submit. That will help them build evidence in case they need it in court.
9. “By the time you’re done fighting us, your toddler could be a teen.”

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Upon receiving a consumer’s dispute, credit bureaus legally have between 30 and 45 days to respond with their findings. But if the bureau, following the lender’s investigation, doesn’t agree that there’s an error, borrowers can be stuck fighting that decision for years. The NCLC, for instance, says it has worked with attorneys representing consumers who were trying to resolve such issues in court for up to 10 years. The CDIA, for its part, cites a 2011 credit-industry-funded study by the nonprofit Policy and Economic Research Council, which works on public and economic policy matters, which found that 95% of consumers are satisfied with the result of their disputes.
Consumer advocates contend there are few options for consumers, and they often require waiting to recover their true credit history for many years. Individuals who decide not to fight the bureaus will be stuck with the error for seven to 10 years — that’s the amount of time it takes for negative credit events, such as bankruptcies and foreclosures, to be automatically removed from a credit report.
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10. “Be careful what you pay for.”
For a price ranging from $7 to $20, credit bureaus and other companies will sell consumers their credit score. But in some cases, consumers are paying to see an “educational score” — one that’s based on their credit activity and can give them an idea of where they stand as borrowers — rather than the actual score a lender will see when reviewing their loan application.

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One out of five consumers who purchase their credit score will likely receive a score that is “meaningfully different” than the one a lender would get, according to a CFPB study released in September. As a result, the CFPB says, they may end up with loan terms that are different from what they expected, and they could waste time applying for a loan that they’re not qualified for. The CDIA, which represents the credit bureaus, says that no single score is used by all lenders and that as an educational tool, credit scores can help consumers better understand their creditworthiness relative to others.
While consumers tend to think of one credit score, there are actually many different types of scores, each with its own mix of payment history, debt and other factors, which the bureaus are selling. Equifax, Experian and TransUnion each have at least one score of their own, and then there’s also the so-called VantageScore, which was created by the three bureaus. Though lenders have access to many scores, the FICO score — a measure of credit risk that ranges from 300 to 850 and is calculated based on the data in credit reports from the three major credit bureaus — remains the most widely used in 90% of consumer and mortgage loan decisions, according to CEB TowerGroup, a financial services research firm. Consumers can purchase their FICO score on MyFico.com, FICO’s consumer division.