Why the Credit Bureaus Can't Get It Right

A mistake on your credit report can cost you literally thousands of dollars, especially in this economy. So what can you expect from a big credit bureau if you ask them to investigate and correct the error?

The answer, for many consumers: About 50 cents worth of effort, conducted by offshore workers at third-party firms. That’s just one of the findings from SmartMoney’s investigation into why credit-report errors continue to pop up so frequently—and why consumers often have so much trouble getting them fixed.

To follow what one consumer advocate calls an “electronic hot potato,” SmartMoney pieced together a depiction of the dispute process through information from trial depositions, internal company memos and the bureaus’ own employee manuals—much of which the bureaus and their trade group subsequently confirmed. The process may be efficient, but it remains a mystery to most consumers, and a source of bitterness for some.

For Brandon and Amanda Mendelson, it had all the elements of a paperback thriller: the innocent newlyweds, the mysterious account held by an obscure bank in Boca Raton, the faceless corporation controlling everything behind the scenes. But when the Mendelsons discovered the strange overdue loan mistakenly listed on Amanda’s credit report, they weren’t exactly thrilled. The Glens Falls, N.Y., couple had never done business with that bank, and the error spoiled Amanda’s credit history. Making matters worse, their call to a national credit bureau yielded nothing more than a form letter stating that the accuracy of the entry had been “investigated” and “verified.” Now they can’t help but wonder: investigated how? Verified by whom? Brandon studied organizational leadership in school, but even he can’t imagine how the bureau failed to fix such an obvious mistake. “Maybe it fell through the cracks,” he says.

Or maybe the process worked pretty much as it was designed to. Although they generally decline to discuss specific cases, the three major credit bureaus—Experian, Equifax and TransUnion—each attest to their commitment to accuracy and accountability in their record keeping. But while consumers might assume that each bureau employs an army of dedicated sleuths who carefully investigate and correct errors, all the bureaus actually process most disputes using a system that’s almost entirely automated—and where human beings are involved, they’re often working at a harried pace. The bureaus say the system, dubbed with the Muppety acronym e-OSCAR, is the most efficient way to handle the more than 20,000 disputes a day they receive. In practice, most complaints are electronically zapped straight to the lender, and according to consumer advocates, many lenders respond by simply rereporting the erroneous data.

Credit-report accuracy is profoundly important now, because an error can wreak more havoc than ever on your financial life. Before the nation heard the words credit crisis, just about anyone with a pulse could get a loan. Now many banks are refusing credit to anyone who looks remotely risky. And as legions of anxious job hunters know, a growing number of employers routinely check credit reports before they make a hire. It’s no wonder, then, that the National Foundation for Credit Counseling says call volume is up 31 percent in the past 12 months. “Credit is on consumers’ minds more than ever before,” says Curtis Arnold, CEO of CardRatings.com.

But according to a 2007 survey by pollster Zogby, 37 percent of consumers who obtain their credit reports find errors, and half of those said they could not easily correct the mistakes. An earlier study by the U.S. Public Interest Research Group, a nonprofit consumer advocacy organization, found that one in four reports contained “serious errors.” For its part, the Consumer Data Industry Association, the industry’s trade group, says only 11 percent of consumers who get their credit report file a dispute and just 5 percent of those challenge the results. “That’s an excellent satisfaction rate,” says the group’s president, Stuart Pratt. Still, even some industry insiders say there’s a problem. Testifying before Congress, one CEO of an independent Arizona credit bureau likened the dispute process to “having an IRS audit, brain surgery, getting a tooth pulled or going to your own funeral.”

And when the dispute process fails, consumers say they are left feeling powerless. Martha Soto, a 63-year-old Antioch, Calif., shipping manager, says she couldn’t get the mortgage she needed last fall because Experian listed her as the defendant in an unpaid court judgment. She says she’s faxed records proving that she’s actually the plaintiff; Experian says they’re the wrong records, and the dispute is still unresolved, leaving Soto increasingly frustrated. “They’re defaming you, and you can’t do anything about it,” says Soto. “It’s scary to think an agency like that can control your life.”

Until the late 1980s, consumer credit records were scattered among thousands of low-profile local bureaus. But the industry gradually underwent a consolidation frenzy that left three companies controlling the data of 210 million Americans. The smallest, Chicago-based TransUnion, is owned by the Pritzker family of the Hyatt hotel fortune and boasts credit-reporting operations in 25 countries, including Nicaragua and Botswana. Publicly traded Equifax, founded in 1898 by a Tennessee grocer who sold his customers’ payment records to fellow shopkeepers, calls itself a “global leader in information solutions” with businesses as diverse as risk detection and database management. (According to its income statements, its consumer data unit remains its most profitable, boasting a 40 percent pretax profit margin.) Experian, the largest of the three and based in Ireland, is a $4 billion company that uses consumer data to help businesses send more than 20 billion pieces of junk mail every year.

Together, the three credit bureaus have amassed a spotty record on consumer care. In 2000 they jointly paid a $2.5 million Federal Trade Commission fine for blocking millions of phone calls from consumers. Three years later Equifax paid a second fine because it still hadn’t hired enough people to answer the phone. In 2005, after new federal laws forced the bureaus to give away credit reports, Experian was hit with a $950,000 FTC fine for marketing those reports through a Web site that automatically charged consumers for an $80 credit-monitoring service. Last year TransUnion agreed to pay $75 million to settle a class-action lawsuit over sales of consumer data for marketing purposes.

The bureaus, which never admitted wrongdoing in these cases, say they realize the importance of providing reliable information to lenders and consumers alike. “If we don’t, we cannot survive, either as a company or as an economy,” says Equifax spokesperson Tim Klein. But they also admit that credit-report errors can stem from glitches in their own systems. Some mistakes occur thanks to the algorithms used to match loans to individual credit reports. If the name or Social Security number on another person’s account partially matches the data on your file, the computer might attach it to your record. The credit bureaus also employ contractors who gather tax lien and bankruptcy data from courthouses and government offices. If these workers transpose a digit or misread a document, their error winds up on your report. But even if they never made mistakes of their own, the bureaus say they can’t possibly patrol the accuracy of the 3.5 billion pieces of account information they receive every month from lenders. “We’re the library,” says Maxine Sweet, Experian’s director of public education. “We don’t write the book.”