Your credit score might be better than you think.
In the first comprehensive study of its kind, the Federal Trade Commission reported Monday that some 40 million Americans could be suffering from errors that are keeping their credit scores lower — and their borrowing rates higher — than they should be.
The FTC study found that 1 in 5 American consumers had at least one error on their credit report from one of the three leading services — Experian Information Solutions Inc., Equifax Inc., and TransUnion — and 5 percent had an error so significant that they could end up paying more for mortgages and auto loans because of these mistakes.
“The system has errors in it, there’s no doubt about it,” said Paul Pautler, deputy director of the FTC’s Bureau of Economics.
The report sheds a light on growing concerns about the accuracy of credit scores.
“This confirms many other studies that have shown credit-reporting data are inaccurate for the vast majority of consumers,” said Ric Edelman, chairman and CEO of Edelman Financial Services in Fairfax.
He pointed to a 2004 study from the National Association of Public Interest Research Groups that found 79 percent of all credit files have mistakes, and 1in 4 credit reports has errors that could cause someone to be denied credit.
Greg McBride, senior financial analyst at Bankrate.com, said the FTC report shows that consumers should be more diligent in checking their credit scores. “Your best defense is a good offense,” he said.
To protect against this, the FTC is also warning consumers to check their credit reports at least once a year, and dispute any inaccuracies they find.
“These are eye-opening numbers for American consumers,” Howard Shelanski, director of the Bureau of Economics at the FTC, said in a statement. “The results of this first-of-its-kind study make it clear that consumers should check their credit reports regularly. If they don’t, they are potentially putting their pocketbooks at risk.”
But credit reporting agencies disputed the accuracy of the FTC report.
“Repeated studies have shown that despite the fact that billions of individual pieces of data are received and processed each year, the credit reports assembled provide highly accurate assessments of consumer history that both businesses and consumers can use to make informed financial decisions,” the Consumer Data Industry Association said in a statement to CBS’ “60 Minutes,” which aired a segment on the questions surrounding the industry Sunday.
“Credit reporting agencies have a simple goal: We want to provide the most accurate data possible,” the CDIA added.
Traditionally, the credit reporting agencies have placed much of the blame for faulty data on creditors and identity thieves. The rating services maintain that they are only reporting the numbers that creditors give them.
Mr. Edelman said there should still be penalties for these mistakes.
“A newspaper would never merely publish data, because someone told them something, they would verify it,” Mr. Edelman said. “Why don’t the credit reporting agencies have the same approach?”
Mr. Edelman would like to see the FTC step in with penalties for inaccurate credit reporting.
“The time has come for the government to impose greater standards and penalties for organizations that are careless with the information they post to credit reports,” he said. “The creditors who report to the agencies are at fault, because they upload erroneous, outdated information, but the agencies should take a few steps to verify what is obviously inaccurate information.”
The study, which was commissioned by Congress, found that 1 in 5 consumers had to dispute their credit score to get an error corrected. One in 20 consumers saw their credit scores change by more than 25 points after the error was corrected.
The FTC recommended that consumers use AnnualCreditReport.com to check their scores for free.
“Your credit report has information about your finances and your bill-paying history, so it’s important to make sure it’s accurate,” Charles Harwood, acting director of the FTC’s Bureau of Consumer Protection, said in a statement.
Unfortunately, people often neglect their credit reports.
“This doesn’t surprise me at all,” Mr. McBride said. “People don’t utilize the opportunity to get free copies of their credit report and get those inaccurate items corrected.”