You’ve heard of credit because you have credit or you will have credit sometime in the near future. You understand how important it is, realize the difference between scores and reports, and know what it means to have a score of 750 versus a score of 450. But there are also things you don’t know about credit because why else would you be reading this?
More important than what you do or don’t know, however, is what you think you know about the credit industry, but have merely assumed.
1. Credit Bureaus Are Government Agencies
Contrary to public opinion, the credit bureaus which produce your credit reports are NOT affiliated with the government in any official capacity. Equifax, Experian, and TransUnion, the three major consumer reporting agencies in America, are private-sector companies participating in a multi-billion-dollar industry. They make these billions by gathering information on consumer practices and selling it to banks, insurance companies, and employers. Their only real affiliation with any federal oversight is their compliance with consumer protection statutes, which list your civil liberties as a consumer.
Read that again. Consumer protection statutes.
Well, what exactly do you, as a consumer, need to be protected from when it comes to credit?
2. Credit Scoring Is a Fair and Consistent Practice
How can any practice be fair or consistent if it lacks transparency? That’s what you should be asking yourself instead of happily assuming that your credit score is a fair assessment of your financial trustworthiness. To begin, reducing complex human beings into simplistic numerical values is a bit of an arbitrary process, especially when you take into account the amount of sloppy mistakes credit reports are prone to. Then there’s the fact that each bureau generates their reports differently, so your FICO Score is really the Frankenstein-esque child of three different, though similar scores. I don’t know about you, but I wouldn’t exactly call that the model of consistency.
Finally, let’s remember that a) the leading score model, FICO, is dependant on a super-secret statistical formula which nobody outside of the company has access to and b) most people don’t even realize that scoring models other than FICO exist and are used by companies. Basically, you’re coming to the table with the cards stacked against you in favor of shady corporate entities looking to capitalize on your ignorance of their competition and your options as a consumer. This may sound like a conspiracy-theory, but the predatory and exploitative nature of the credit industry is well-documented in private and public-sector studies.
3. Credit Scores Are Infallible
The credit bureaus create and maintain credit files for about 200 million adults in North America, and about 40 million of those files reportedly contain inaccurate information according to a study conducted by The Federal Trade Commission. Worse, nearly 10 million consumers’ credit scores have been negatively impacted by that inaccurate information. To scale it down, that means that every 1 in 5 Americans has inaccurate information on their report, and 1 in 20 see that inaccurate information negatively impact their score, through no fault of their own.
4. You Cannot Contest Your Credit Report
The Fair Credit Reporting Act of 1970 (since amended and improved) gives consumers the explicit right to contest information on their credit report and to sue a consumer reporting agency in state or federal court in the case that their FCRA rights have been violated. If you’re wondering what these rights are, you can check out the 100 page document on ftc.gov or read our handy-dandy summary in the previous article.
5. Credit Reporting Agencies View You as a Valued Customer
I can’t blame you for assuming this, especially since you have the power to sue these companies for malpractice (which is a pretty good incentive for them to do their job correctly). However, when credit reporting agencies look at you, they don’t see a customer; they see a data set waiting to be sold to the highest bidder. There is no personalized customer service at the level they’re operating on, which contains millions of files and billions of dollars. A mistake only exists to a reporting agency when it’s detected (which is itself a difficult process), and even then the process of revising the mistake is lengthy and energy-consuming, wasting time you don’t have when you’re in the process of applying for a job or a mortgage.
Ultimately, the best way to avoid making faulty assumptions and being chewed up and spit back out by the credit industry is to stay aware of your rights as a consumer and to keep a critical eye on your reports and scores. Of course, millions of Americans have bad credit scores due wholly to their own irresponsible spending habits and late payments (we can’t blame everything on the shady credit bureaus, sadly). Read on to the last installments of our Credit Repair 101 series to identify what you might be doing to harm your credit, and what you could be doing to build it.