Three Ways the Fair Credit Reporting Act (FCRA) Did Not Fulfill Its Promise

By: Stuart Hunter

"It is the purpose of this title to require that consumer reporting agencies adopt reasonable procedures for meeting the needs of commerce for consumer credit, personnel, insurance, and other information in a manner which is fair and equitable to the consumer, with regard to the confidentiality, accuracy, relevancy, and proper utilization of such information in accordance with the requirements of this title."

A direct quotation from the U.S. Congress, the preceeding text is the purpose of the Fair Credit Reporting Act. In short, the FCRA was created to protect Americans against unjust practices of the credit reporting system.

While the mission of the FCRA is an admirable one, a quick survey of today's credit systems shows the results have ended up short of expectations. What follows is how the FCRA has been unsuccessful in producing a just credit system for consumers.

Detailing the Failures of the Credit Reporting System

1) Accuracy - It is well documented that credit reports contain inaccuracies but it is worth repeating. Recent studies show that 79 of credit reports contain factual errors such as the same listing added more than once, wrong dates, tradelines placed on the wrong credit reports, and positive credit accounts that are not included.

These same studies also indicate that 25 of credit reports include errors significant enough to cause outright denial of credit.

How fair is a credit system that can cause a person to be declined for a loan or force them to pay higher interest rates than are necessary based on their actual credit risk? Granted, you have the right to dispute these inaccurate listings , but this is not necessarily easy or foolproof. Depending on the nature of inaccurate items in your credit file, repairing your credit can be a maddening and time consuming ordeal you are forced into because of no fault of your own.

2) Relevancy - While they may not communicate it directly, the Experian, Equifax, and TransUnion's creation of the VantageScore is evidence enough that the current FICO based credit scoring models are not as predicative as they could be. According to Experian spokesman Donald Girard, the VantageScore is "the most sophisticated, highly predictive scoring model that's available in the marketplace" and as a consequence the much more popular FICO score is less so.

One of the shortcomings in the FICO score that the VantageScore tried to fix is the importance that very old credit listings have on the credit score. According to Dr. Bonnie Guiton Hill, advisor to President Bush on consumer affairs, "it is our understanding that computer models that predict credit worthiness find most information that is more than two years old nonessential." This is why newly created scoring models like the VantageScore are beginning to ignore credit accounts that are over 3 years old. It does not serve to accurately predict a consumer's credit worthiness.

So why have lenders been so reluctant to adopt scoring models such as the VantageScore? They suggest it is because FICO is engrained in the credit system. A more cynical answer is that these lenders are not willing to sacrifice the profits they make from charging higher than necessary interest rates on loans provided to people who are a relatively low credit risk.

3) Proper Utilization - With how common it is for a credit score to be a gross misrepresentation of a person's credit worthiness, the point could be made that the popularity of credit scores in the financial market is inappropriate. In today's society, however., the use of credit scores goes far beyond determining the size of a loan and its interest rate.

Employers, landlords, insurance companies and others frequently ask to see your credit reports. In today's society your ability to be considered for certain job, rent an apartment, or get approvedqualify for reasonable insurance premium can all be dependent on your credit rating.

Improper is a subjective word, but getting passed over for a job because of completely irrelevant and possibly erroneous negative credit items in your credit files that are plugged into a less than perfect credit scoring formula to produce a credit score that is not indicative of your true credit risk fits the bill.

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For more information about the FCRA and how it affords you the right to legally fix bad credit, visit Lexington Law, the trusted leaders in credit repair.

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