Unlike most Inauguration and changing-of-the-guard celebrations, we turn our calendars with more trepidation and fear than ever as we face an uncertain and difficult 2009. Many people have resolved to be more responsible financially by saving more and spending less. It is truly beginning to resonate with our countrymen that we must become more financially prudent and place a premium on keeping their credit in good standing. And people realize just how precious jobs really are. No one I speak to these days is taking their jobs for granted. They are going the extra mile to insure job security.
Work might just be a coveted activity in light of the hardships many face. But for so many people, making ends meet and keeping a roof over their families’ heads will be more difficult than ever. We have already seen the surge in foreclosures, which unfortunately may not abate for some time. As more and more Americans face financial challenges, their good credit standings will be at risk, which will make their personal economic recoveries even more difficult down the road. Many once financially secure individuals have now lost 40 percent of their investment portfolio and are fearful that the worst is yet to come.
Consumer-credit agencies are the messengers who carry credit information from one group of financial institutions to another. These credit agencies are merely consumer-credit databases. If the information in the database is incorrect, do not kill the messenger, but go after the creditor who submitted the incorrect information. The only regulatory requirement that should be imposed on the credit agencies is one of full disclosure to the consumer about the information in their databases about that particular consumer. That is the intent of the Fair Credit Reporting Act. If there needs to be an additional regulatory burden on the credit agencies’ databases, it should be imposed on the creditor submitting the data. These creditors should have the responsibility for submitting correct information and correcting it in a timely manner if it is incorrect.
Financial institutions, insurance companies, credit-card companies, department stores, hospitals, landlords, courts, and other creditors submit data to the credit agencies about their payment experiences with various debtors and consumers. This information is put into a database by the credit agencies, who use an algorithm to summarize this data in the form of a credit score. The problem with the credit score is not the algorithm or black-box formula used to create the credit score. The problem is the accuracy of the data going into the database. Should that be the responsibility of the contributing creditor or the credit agency? It should be the responsibility of the contributing creditor to submit correct credit information to the credit agencies.
There is no practical way for the credit agencies to check on the volume of data that is submitted. However, if submitting creditors are fined for incorrectly submitted information that is not corrected in a timely manner, they would make it a priority to submit correct information.
The principal users of the credit reports are the same institutions that submit the data. The credit agencies do not determine whether a consumer gets credit. The consumer-credit decision is made by the financial institution, department store or landlord using the credit history in the form of a credit score, in addition to other information, to determine whether to extend credit. The credit agencies are not the credit decision-makers. Consumers also have a role to play in this process. They need to check to see whether the information in their credit file is accurate. The Fair Credit Reporting Act is intended to make this possible. If there is a dispute between the submitting creditor and the consumer about the facts, perhaps the credit agencies need to disclose both sides of the dispute to the users of the credit reports. The credit reporting agency is not in a position to settle that dispute or to ignore the dispute.
The best way for a consumer to improve his credit score is to live within his financial means. That may sound old-fashioned, but it is wisdom based on experience. If a consumer’s expenses are comfortably below his income, and he has successfully satisfied past financial obligations, banks and other lenders are more likely to extend credit within his means. Errors and legitimate disputes will arise, but the consumer should not be powerless to correct errors or disclose legitimate disputes. If the credit agencies are not permitting the consumer to give his side of a dispute, perhaps some additional regulation is needed. Consumers, however, should not be able to hide the disclosure of a legitimate dispute.
Armstrong Williams’ column for The Washington Times appears on Mondays.