Editor’s note: Mike Litt is the US PIRG’s Consumer Campaign Director. The opinions expressed in this commentary are his own.
The US credit reporting system is broken. We saw the latest evidence of this last week, when news broke that Equifax had sent lenders millions of incorrect credit scores, some of which were off by at least 25 points, for consumers applying for loans. cars, mortgages and credit cards.
American consumers have long complained about errors in their credit reports and the inability of the credit bureaus to correct those errors. Far too often, people are penalized for errors made by credit bureaus or data providers, and for irrelevant information, such as job loss or illness, that does not predict credit default. . This can prevent people from getting mortgages, good interest rates on car loans or credit cards, or even a job.
We’re past the tipping point for an overhaul, but clearly we can’t count on the credit bureaus to overhaul. The latest news from Equifax should push Congress and regulators to finally implement the fixes that consumers and advocates have long been calling for. This means making credit reports and credit scores fairer, more accurate and more transparent.
Here are some places where they can start:
The Big Three credit bureaus, which create and host credit reports without our consent, act as de facto gatekeepers to much of the financial market. Credit scores, which lenders use to determine our creditworthiness when we apply for mortgages, loans and lines of credit, are derived from credit report information and calculated using non-transparent algorithms.
These credit bureaus are required under the Fair Credit Reporting Act (FCRA) to “follow reasonable procedures to ensure maximum possible accuracy.” However, the Consumer Financial Protection Bureau (CFPB), the federal agency charged with protecting consumers, continues to find that credit reports include information from unreliable data providers, which can mean that often the information is incorrect and unreliable.
To ensure that information ends up on the correct person’s report, the CFPB should require stricter identity matching criteria than currently exists, such as using all nine digits of a social security number to confirm the identity of a person.
The CFPB also found inadequate handling of disputes, including failure to review all information consumers submitted to dispute errors on their credit reports.
Representative Ayanna Pressley’s Comprehensive CREDIT Act is the gold standard for fixing credit bureaus. Among other provisions, it would make it easier for consumers to correct errors in their reports by creating a new right to appeal the results of a credit bureau’s investigation of a dispute.
In recent years, the CFPB has fined the three national credit bureaus – Equifax, Experian and TransUnion – millions of dollars for using deceptive marketing tactics in the sale of credit scores.
The Comprehensive CREDIT Act would direct the CFPB to establish standards to verify the accuracy and predictive value of credit scoring models. It would also create a new right to a free annual credit score from each of the national credit bureaus. This would be in addition to the existing right of consumers to access a free credit report each year from each national credit bureau. Auto, mortgage and private student lenders would also be required to provide consumers with copies of credit reports and scores obtained to make decisions about their loan.
Credit reports are meant to give creditors an accurate picture of whether or not a consumer is at risk in the event of a future default. But too often they contain information, apart from errors, that does not predict credit default or is due to a particular situation – often health-related – that is no longer relevant.
Following the March release of a report on medical debt from the CFPB, which found that approximately $88 billion in medical debt was on consumer credit reports, the three national credit bureaus announced changes in how they will handle the statement of medical debt. These changes include not reporting medical debts that have been paid off and, starting in 2023, not reporting medical debts under $500.
While these changes will bring relief to many Americans, CFPB analysis shows that nearly half of people who currently have medical debt on their reports will still have it after all the changes take effect. Since many health issues are beyond our control, medically necessary debt on credit reports shouldn’t just be limited – it shouldn’t be reported or considered at all. The Comprehensive CREDIT Act would end reporting of all medically necessary debt.
Finally, it is also worth considering the idea of replacing the oligopoly of private credit bureaus with a public credit registry, which would put the needs of consumers ahead of those who purchase their information by prioritizing accuracy and transparency. It could hold companies that consistently provide incorrect or incomplete information liable to fines.
Credit bureaus collect, store and share our data without our permission. It’s time we made them accountable to us, not the companies paying them to access our (not always accurate) credit information.