What Percentage of Credit Reports Contain Errors?

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It’s no secret that credit reports and credit scores are important to consumers. A solid credit report and impressive credit scores lead to inexpensive financing options, which means more money in your wallet at the end of the month. Having good credit is really not that different than choosing the right stock or mutual fund in terms of its wealth building value.

Errors in your credit reports can delay or prevent you from being approved for a mortgage, an auto loan, a credit card and any other financial or insurance product that’s underwritten using a credit report.  And, errors on credit reports can also prevent you from getting certain types of jobs and require you to pay deposits on public utilities. The question, however, is do your three credit reports contain errors?

Consumers can easily review credit reports for accuracy by pulling them once every 12 months at no cost from www.annualcreditreport.com. And, there are also free credit monitoring options as well such as those offered by CreditSesame.com. And on the off chance you think the volume of credit report errors are minimal, there are several credit file accuracy studies that may change your mind.

In June of 2004 a consumer advocacy organization called the U.S Public Interest Research Group (hereafter “PIRG”) published the first of three generally recognized credit file accuracy studies. And, unfortunately for them, it’s also the one taken less seriously than the other two. The PIRG study, as most call it, seems to have been structured in such a way to support the most distressing headline possible regarding credit file accuracy. Their study suggested that almost 80% of credit reports contain errors and I don’t think any reasonable person actually believes that.

First off the study only included 197 consumers, which is woefully inadequate. The credit bureaus each maintain credit files on over 200 million consumers so a sample of 197 simply isn’t going to be statistically relevant. Finally, the sample used wasn’t random but was made up from PIRG’s staff, partners, friends and members. This calls into question the value of their sample.

PIRG also used the most liberal definition of “error” and included meaningless mistakes like incorrect addresses or other demographic information.  Demographic information is not considered by credit scoring systems so there is virtually no chance a consumer can be denied anything based on that data. The “errors” were also self reported, which means if a consumer simply misunderstood their credit report data they could have reported it as an error when it really was accurate.

In May of 2011 an industry funded group called the Policy and Economic Research Council (hereafter “PERC”) published the second of the generally recognized credit file accuracy studies. Their study was performed by a much more capable group of academics than the PIRG study. Nonetheless their study results still kicked up some red flags. Their study suggested that less than 1% of credit reports contained “material” errors.

A material error was one that was problematic enough to lower a consumer’s credit score by at least 25 points.  And, if the item were corrected the credit report would have scored at least 25 points higher. The variable definition of “error” seems to make more sense given that not all credit file mistakes cause problems and could be cosmetic in nature.

The criticism of the PERC is not because of anything they did but more so because of who they are and where their funding comes from. They are funded by the credit reporting industry and their study was also funded by the credit industry. Further, it appears the credit industry’s trade association was considerably involved in the study. And finally, conversely to the PIRG study, nobody really believes less than 1% of credit reports contain material errors.

In early 2013 the Federal Trade Commission (hereafter “FTC”) published the last of the generally recognized credit file accuracy studies.  Unlike PIRG and PERC, the FTC is a much more recognizable organization and it’s their study that seems to be getting the most play and taken most seriously.  Of course that can also be caused by the fact their study is the newest. The FTC also, along with the Consumer Financial Protection Bureau, maintains regulatory control over the credit bureaus.

According to the FTC between 10 and 21% of consumers have errors on their credit reports. The percentage varies because the FTC’s definition of “error” also varies. The lower percentage represents a more conservative definition and the larger percentage represents a more liberal definition.

The FTC also quantified errors at the “consumer” level rather than at the credit report level, which leads to a frightful number of erroneous reports.  If the credit bureaus each maintain over 200 million credit files and there are three of them then that means at least 600 million credit files are currently in circulation. 10 to 21% of consumers would equal between 60 million and 126 million consumers, assuming the consumer had the same error on all three of their credit reports.

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