The news that the three largest credit bureaus have agreed to reform their practices has been hailed as an important step in improving the accuracy of credit reports. But while these new procedures certainly offer consumers greater protection and more transparency in the reporting process, there is reason to believe that they will not bring about a significant decline in the frequency of serious reporting errors.
New York Attorney General Eric Schneiderman announced in early March an agreement with Experian, Equifax and TransUnion that will trigger a nationwide overhaul of the processes by which the companies investigate potential errors on credit reports. Until now, the agencies relied on a largely automated dispute resolution system that could overlook consumers claims. Now they will have greater success in getting the details of their disputes reviewed by credit bureau employees. This mandatory closer look may end up resolving more disputes in favor of the consumer, squeezing some errors out of consumer files.
The agreement also slows the reporting of delinquent medical debt to allow time for consumers and their medical providers to resolve insurance payments and other billing issues. Credit bureaus must wait 180 days before reporting medical debts as due for collection on consumers credit reports. This step would prevent many medical-bill collection issues from impacting credit reports. Over half of all unpaid collection items on credit reports are related to medical bills, according to a 2014 report from the Consumer Financial Protection Bureau.
Both changes inject greater deliberation into the credit reporting process, and they will probably be fairer to consumers. But the benefits of the changes with regards to the accuracy of credit reports are being oversold.
For one thing, the rate of serious errors in credit reports is already relatively low. A 2013 study from the Federal Trade Commission found that 5.5% of consumers in a nationally representative sample of 1,001 people had errors in their credit reports that could mean the difference between loan approval and rejection or that could lead to higher interest rates.
Moreover, when consumers notice errors, the success rate for getting disputed information corrected on a credit report is already relatively high. The FTC found that credit bureaus made changes to disputed items for 80% of the consumers who filed a dispute.
To be sure, no one wants to be part of the 5.5% of Americans with serious errors on their reports. That translates to more than 10 million individuals for whom errors could impose significant costs in the form of denial of service or significantly higher interest rates.
But with an 80% chance of having disputed items corrected, the important message for consumers is to simply check their credit reports.
Since 2003, consumers have been able to check credit reports for free from each of the three bureaus once a year. Many consumers know they have this right. But 65% of respondents in a 2013 survey of 2,037 adults sponsored by the National Foundation for Credit Counseling said they had not reviewed their credit report in the past 12 months. And in 2012, a Consumer Financial Protection Bureau study concluded that only 20% of consumers had viewed a credit report in the prior 12 months.
The credit bureaus overhaul of the dispute resolution system and its reporting of collection items will come at a significant cost for both the agencies and data furnishers. For all the costs incurred, the overhaul might boost the success rates on consumer disputes a bit higher.
Credit agencies have both a responsibility and an economic incentive to assemble accurate credit reports. But the fact is that only consumers can easily recognize mistakes. Credit agencies only know what creditors tell them, and either party can make mistakes in the process of transmitting data and assembling files. More than 10,000 data furnishers send 1.3 billion account updates to each of the bureaus every month, along with three million Americans who move and send change-of-address notices, according to the CFPB. Opportunities for mismatched data abound.
So regardless of the reforms, consumers will still have to take the initiative. The best way to squeeze the 5% error rate toward zero is active consumer engagement in the inspection process.
Both the regulators and the credit industry would be best served by investing in the following message to consumers: Check your credit report.
Michael Staten holds the Take Charge America endowed chair at the University of Arizona, where he is also director of the Take Charge America Institute for Consumer Financial Education and Research. Staten was a principle investigator on the FTC's credit report accuracy study published in 2013. Follow him on Twitter @staten_arizona.