25% of Credit Information Is Flat-Out Wrong? How Consumers Are Getting Screwed
November 16, 2012 |
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Monopoly. We all know the game – one of the Parker Brothers’ best – as a quintessential American pastime with the potential to bring generations together (or spark heated arguments among those of us with a bit of a competitive streak). But when that term is applied not to board games, but instead to board rooms, it has a decidedly negative connotation. Everyone knows how important competition is to a free market economy, after all.
That’s what makes the ineptitude and pervasive conflicts of interest that mark the credit reporting and scoring industry due to a lack of competition so hard to fathom. It’s also what underscores the drastic need for reform.
Credit Reporting Conflicts of Interest
A relatively small number of companies – namely Experian, Equifax, and TransUnion – currently dominate the credit reporting space and use our credit data more as a means of advancing their own business interests than serving the needs of their customers (i.e. us and the lenders who review consumer credit reports). A perfect example of this is how Experian has made FICO Scores based on their reports -- inaccessible to consumers, yet accessible to big banks. They did so to encourage use of their own in-house credit score, but the move also made it impossible for consumers to understand how they’re being rated by a lot of lenders. In other words, the ability for consumers to make sound financial decisions was expendable in the pursuit of maximized profits. That’s not the exception either, it’s the norm. The interests of credit reporting companies simply aren’t always in line with those of consumers (i.e. accurate and accessible data).
Credit Reporting Inaccuracies
Credit reporting conflicts of interest don’t represent the only downside stemming from the dearth of credit reporting competition either. We’ve also had to tolerate an alarming amount of inaccurate information in our credit reports. Studies have shown that as many as 25% of credit reports contain errors significant enough to cause a denial of credit. When you consider that the ability to build credit is perhaps more important than Internet access in this day and age – given that it’s used in extending loans, making employment decisions, tenant screening, evaluating vehicle lease applications, etc. – it’s obvious how detrimental credit report mistakes can be for you and me. And that’s not even to mention the fact that debt collectors use credit reports to go after consumers. If this information isn’t accurate, you could be forced to pay and undergo a lot of stress unnecessarily.
So, what exactly can regulators do?
How to Cure What Ills the Credit Reporting Industry
Well, the Consumer Financial Protection Bureau (CFPB) actually began monitoring all credit bureaus with at least $7 million in annual revenue (94% of the market) on September 30, 2012, with an emphasis on curtailing the prevalence of mistakes in consumer reports. That’s undoubtedly a great first step, but, in order to bring about lasting fundamental change, regulators need to cut to the chase and require credit bureaus to sell consumer credit data at a set price to any company with the necessary permission to access it.
Simply fostering a more straightforward market for consumer credit data might not seem like a groundbreaking move at first glance, but consider the effect it would have on competition. Credit reporting is a largely untapped $4 billion market, which means countless companies will inevitably be clamoring to get a piece of the pie if the price is right. With more businesses competing with one another to best serve the needs of lenders and consumers alike, it’s only a matter of time before we see:
Ultimately, credit reporting inefficiency isn’t something most people think about unless they have bad credit themselves, and then they’re perceived as whiners who can’t own up to their own mistakes. In reality, however, the credit reporting and scoring industry is deeply flawed and desperately in need of regulatory attention, and the benefit of fixing it would be all of ours to share.
Credit Reporting Conflicts of Interest
A relatively small number of companies – namely Experian, Equifax, and TransUnion – currently dominate the credit reporting space and use our credit data more as a means of advancing their own business interests than serving the needs of their customers (i.e. us and the lenders who review consumer credit reports). A perfect example of this is how Experian has made FICO Scores based on their reports -- inaccessible to consumers, yet accessible to big banks. They did so to encourage use of their own in-house credit score, but the move also made it impossible for consumers to understand how they’re being rated by a lot of lenders. In other words, the ability for consumers to make sound financial decisions was expendable in the pursuit of maximized profits. That’s not the exception either, it’s the norm. The interests of credit reporting companies simply aren’t always in line with those of consumers (i.e. accurate and accessible data).
Credit Reporting Inaccuracies
Credit reporting conflicts of interest don’t represent the only downside stemming from the dearth of credit reporting competition either. We’ve also had to tolerate an alarming amount of inaccurate information in our credit reports. Studies have shown that as many as 25% of credit reports contain errors significant enough to cause a denial of credit. When you consider that the ability to build credit is perhaps more important than Internet access in this day and age – given that it’s used in extending loans, making employment decisions, tenant screening, evaluating vehicle lease applications, etc. – it’s obvious how detrimental credit report mistakes can be for you and me. And that’s not even to mention the fact that debt collectors use credit reports to go after consumers. If this information isn’t accurate, you could be forced to pay and undergo a lot of stress unnecessarily.
So, what exactly can regulators do?
How to Cure What Ills the Credit Reporting Industry
Well, the Consumer Financial Protection Bureau (CFPB) actually began monitoring all credit bureaus with at least $7 million in annual revenue (94% of the market) on September 30, 2012, with an emphasis on curtailing the prevalence of mistakes in consumer reports. That’s undoubtedly a great first step, but, in order to bring about lasting fundamental change, regulators need to cut to the chase and require credit bureaus to sell consumer credit data at a set price to any company with the necessary permission to access it.
Simply fostering a more straightforward market for consumer credit data might not seem like a groundbreaking move at first glance, but consider the effect it would have on competition. Credit reporting is a largely untapped $4 billion market, which means countless companies will inevitably be clamoring to get a piece of the pie if the price is right. With more businesses competing with one another to best serve the needs of lenders and consumers alike, it’s only a matter of time before we see:
- Fewer credit reporting mistakes: With more competition, neither consumers nor banks will have to tolerate error-riddled credit reports, as they could simply switch providers if a particular company is underperforming. That threat would provide ample incentive to emphasize accurate reports and would usher in a race to the top, rather than allowing the current middling practices to persist.
- More predictive credit scores: Much like the above, with more actors involved in credit scoring, companies will have to step up their game in order to garner business. Those with the most advanced credit scoring models will ultimately win out, and banks will have fewer unexpected defaults to deal with.
- Better product terms: Without the need to factor as big of a revenue cushion for unexpected defaults into their product terms and pricing, banks will be able to offer more attractive products and services at lower prices. That will obviously save us a pretty penny. Banks will also be healthier financially, which will have a positive impact on the economy.
- Innovative products and services: It’s no secret that many of the most important everyday inventions stem from research. Expanding access to the credit reporting space could have a similar effect, as companies would likely experiment with new applications and products designed to make sound financial management easier. That’s got to be of interest for the 80% of people who say they could use professional financial assistance, according to the <a href="http://www.nfcc.org/newsroom/FinancialLiteracy/files2012/FLS2012FINALREP... Foundation for Credit Counseling</a>.
- A healthier economy: When you look at all of these things in concert – more accurate credit reports and scores, fewer unexpected defaults, and a more financially capable citizenry – there’s no question that the economy would benefit from increased competition in the credit reporting and scoring industry. We could certainly use it too, considering the struggles of the past few years and the still-high unemployment rate.
Ultimately, credit reporting inefficiency isn’t something most people think about unless they have bad credit themselves, and then they’re perceived as whiners who can’t own up to their own mistakes. In reality, however, the credit reporting and scoring industry is deeply flawed and desperately in need of regulatory attention, and the benefit of fixing it would be all of ours to share.
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