Last week, during some quick research for an article I was writing, I came across a 2004 article posted on CNNMoney.com which stated 25% of credit files contain errors serious enough to decline a loan application.
My last blog revealed that “credit use” errors can harm a consumer’s loan chances. I define, “credit use” errors as the multitude of ways people use existing credit cards that unknowingly lower their FICO scores. The type of credit file errors we’re discussing today have nothing whatsoever to do with the person affected – yet can be financially devastating.
If you could dissect a credit report the way you dissected a frog in biology class, you’d quickly discover that each credit report actually contains thousands of data elements that come from three different companies. These unrelated, disconnected companies are TransUnion, Experian and Equifax. Each company performs essentially the exact same service, compiling loan and payment history on every consumer in America. Ironically, three companies exist because no single one can be depended upon to supply accurate data. This means that the typical credit report actually blends or merges the data from these three different companies to supply (ideally) the most accurate picture of the consumer’s payment history. The silent message here is that these companies make mistakes.
By mistakes I’m speaking of incorrect numbers. Bad data. Outdated information. These are the same mistakes that CNNMoney describes in its 25% error rate. And don’t forget, these are serious errors…large enough to cost the consumer a loan by damaging the credit score.
Last time I checked 25% means that one in four of your loan applicants has a big problem. And this group isn’t helped by the fact that a mortgage originator can’t even tell there’s a problem by looking at the paper credit report. The reason? The credit report reveals a single tradeline which is a merged expression of the data from three companies. And, here’s the kicker, the credit score has no bearing to the tradelines you see on the credit report.
TransUnion, Equifax and Experian each calculate a credit score based on their own data. Let’s assume that all three companies are reporting a ChargeMore credit card for Jeff. The credit report reveals a single tradeline showing that Jeff has never been late, has a high credit limit of $10,000 and carries a balance of $2,000. Everything looks good to both Jeff and his loan officer. Yet, behind the scenes something altogether wrong occurred. While Equifax and Experian both report the ChargeMore card correctly, TransUnion data reflects an outdated card balance of $9,800, in effect reporting a maxed out credit card. Accordingly, Jeff’s TransUnion score reports lower because it was calculated using an incorrect balance. Since the credit report looks fine, its not possible to see the bad data that lowered the TransUnion score, and Jeff pays the price when qualifying.
The good news is that it’s now possible to prevent these situations using free software tools supplied by your credit reporting agency. Before taking the printed, paper credit report at face value, this software does a quick, cost free data scan to ensure no errors exist. Most software can not only identify any errors, but can even reveal how many points you’re losing as a result. Your credit agency can fix most errors without any effort on your part in less than 72 hours. I’m still puzzled why most mortgage originators don’t understand this. The vast majority read a paper credit report from within their LOS system, and never even realize credit error detection is even possible, let alone free and immediate.
I’m hopeful you’ll be different, that before you qualify your next applicant using a paper based credit report, you’ll consider it may very well contain serious data errors. Why let a TransUnion, Equifax or Experian mistake cost your client a loan.
[...] Caped Crusader placed an observative post today on Credit Errors Wrongly Lower FICO Scores [...]