Is There Such Thing As An Accurate Credit Report? I Don’t Think So.
There are three major credit reporting agencies (aka credit bureaus) in this country. And, each of the three claims to house approximately 250,000,000 consumer credit files. Basically if you’re 18 and have ever applied for credit then you’ll have a credit file. That’s roughly 750,000,000 credit files, right?
I’m announcing here and now that that I believe that the vast majority of them contain inaccurate information. That’s quite the condemnation of the credit reporting system. I better be able to back this up. Here goes…
The information on our credit reports comes from multiple sources. However, the majority of the information comes from lenders where we’ve applied for credit.
After your application is approved (hopefully) the lender opens an account in your name. Within roughly 45 days that account could appear on your credit reports. Here’s where the trouble begins and my argument starts to take shape. I believe that there are two fundamental problems with the credit reporting system in the U.S the lead to inaccurate credit reports.
1. Reporting Is Voluntary – There is no law or requirement forcing lenders to report your information to the credit bureaus. Since there are no rules, lenders can pick and choose whether or not they want to report your accounts to any of the credit bureaus. Fact is, many lenders will report your accounts to less than all three.
This is a huge problem because some or all of your credit reports could be missing that history of responsible credit management on your accounts. As such, I would argue that the reports that are missing the account information are inaccurate. A credit report is supposed to be a record of your credit obligations and how you’ve managed them. Having less than all of your account information simply because the lender chooses not to invest in reporting to all three bureaus is inexcusable.
Why else is this a problem? A significant percentage of us have had credit problems (either in the distant past or more recently). These credit problems hurt our credit scores and make it harder for us to get the best offers made by lenders. The voluntary system hurts us twice here.
First, any missing positive account information isn’t able to offset negative account information. While it isn’t an even swap it’s fair to say that having good accounts on your credit reports will help to diffuse the negative impact of bad credit.
Second, the best way to rebuild your poor credit is to establish new credit and begin showing that you can manage it responsibly. Credit scores love to see this. However, if you establish credit with lenders who don’t report to all three bureaus then you’ll never get the full benefit of your good credit. This also applies to young consumers who are trying to establish credit for the fist time. If they open accounts with lenders who don’t report then they won’t be doing anything to build their credit.
So why don’t all lenders report to all three? There are several reasons why they don’t all report to all three. As soon as a lender reports accounts to the credit bureaus they fall under various Fair Credit Reporting Act (FCRA) requirements. These requirements include verifying account information that is disputed by consumers. This takes employees and time and, therefore, is expensive.
Second, by reporting accounts to the credit bureaus the lender then opens themselves up to potential liability for damages or noncompliance with the FCRA. This means lawyers and research and, therefore, is expensive. Are you seeing a trend here?
Third, lenders have to have an account with a credit bureau before they can report account information to their credit file databases. The credit bureaus are all for-profit companies and they aren’t going to include a lender’s account information for free. There are costs involved with having an account with any of the credit bureaus. Some lenders don’t want to pay those fees three separate times each month.
And fourth, transmitting account information to the bureaus takes very specific technical know-how and hardware. Without getting into it and boring you to death let’s just say that it’s, again, expensive.
Loophole? I already know what you’re thinking. “What if I miss payments on the account that isn’t reported? It will never hurt my credit, right?” Wrong. It’s amazing how fast the lender will start reporting your account when you start missing payments. And, if you go really delinquent they’ll assign the account to a collection agency and that will most definitely go on your credit reports…all three of them.
My Conclusion – Any credit report that is missing any of your accounts is an incomplete report and not a true and accurate representation of your credit history