Credit Scores Often Error-Filled, Study Says

By Michael Ha

NU Online News Service, Dec. 18, 3:32 p.m.EST?An analysis of more than 500,000 consumer creditscores suggests that millions of Americans may be paying more fortheir insurance premiums because of inaccurate credit scores.

The new study was conducted by the Consumer Federation ofAmerica in Washington, D.C., and Bloomingdale, Ill.-based NationalCredit Reporting Association.

The organizations analyzed credit scores in 502,623 mergedcredit files and reviewed files of more than 1,700 individuals,maintained by the three major credit repositories: Equifax Inc. inAtlanta, Ga.; Costa Mesa, Calif.-based Experian InformationSolutions Inc.; and Trans Union LLC in Chicago.

The study said it found a significant discrepancy among scoresfrom different credit repositories--an average range of 41 pointsin the scale of approximately 400 to 800 points in themortgage-lending scoring model.

A further analysis of 51 representative files for consistenciesand inconsistencies revealed reasons for these differences inscores, according to the study.

The biggest factor was common errors of omissions, including thefailure to report a negative event, such as a delinquency or chargeoff, or a positive event, such as payments on an account.

The analysis found that nearly 80 percent of the files weremissing a revolving account in good standing while one-third weremissing a mortgage account that had never been late.

"You can conclude from these findings that a significant numberof people are misquoted and adversely impacted in their auto andhome insurance," said Robert Hunter, director of insurance atCFA.

Mr. Hunter suggested that insurers should immediately provideconsumers who suffer adverse actions from their credit reports afree copy of the reports that were used for the decision. And ifinaccuracies are found, insurers should quickly reconsider theirdecision.

"If an insurance agent says rates would go up because of badcredit scores, you should get a copy of your scores right away," hesaid. "People shouldn't be paying higher rates for errors, and wefound that such errors were significant at all levels."

Under the Fair Credit Reporting Act, insurers that use creditreports are required to tell consumers that they have the right toget copies of their reports. But the process to request them andchallenge their accuracy can take months, "so you might as wellforget it for a six-month auto insurance policy." Mr. Huntersaid.

He said the Federation believes "consumers should be able to geta copy right away, and the whole thing could be done in a day ortwo."

In addition, consumers can take preventive steps to reduce thechance of unfairly receiving adverse actions such as being chargedhigher premiums, according to CFA.

The groups advised that consumers should maintain consistency incredit applications by using their full legal name. And insuredsshould also review their credit records regularly by purchasingcredit reports and scores from major credit repositories once ayear and disputing any errors that appear on their reports bycontacting the relevant credit repository.

"This frequent huge discrepancy in scores reveals the importanceof consumers being able to quickly learn of and correctinaccuracies," Mr. Hunter said.

In response to the report, one of the credit firms suggested thenumber of files analyzed might be too small to offer manymeaningful conclusions.

"The study had various parts to it--the total number of filesexamined ranged up to half a million. But it looked at only 51files to analyze consistencies and errors of omissions. If thenumber of files was bigger, results could have been different,"said Donald Girard, public relations director at Experian.

"Even 500,000 credit files are only one-fourth of one-percent ofthe size of our database, which has 205 million files. The same istrue for Equifax and Trans Union. We haven't had our statisticianslook at the study yet, but the study size is very small, so anyextrapolation must be done with care," Mr. Girard said.

He added that the system "is governed by the Federal TradeCommission, and it has been complimentary about the system as it iscurrently configured.It doesn't mean that we are not improving iteveryday. Of course we are. We are improving it on a dailybasis--we always have been."