[Corp. Watch] Credit hell: Million-dollar companies' mistakes are your problem

[Corporation Watch]

Pitfalls of Credit Reports

 by Jonathan K. Nathan

(SF Chronicle, May 16) -- Rhoda Ausman prides herself on being a responsible consumer. The executive administrative assistant from San Jose says she pays her bills on time. She doesn't buy what she can't afford, and saves money whenever she can. It isn't always easy, but she's been able to stay afloat.

	In November 2008, American Express denied her a creditcard because of a 7-year-old bankruptcy filing that didn't belong to her. In fact, Ausman has never filed for bankruptcy. But American Express told her that Experian, one of the nation's leading consumer credit scoring bureaus, reported a 2001 bankruptcy filing on her credit report.

	On Feb. 22, 2009, an e-mail from a representative of Consumer Action, a San Francisco non-profit consumer advocacy organization, told her that the filing was so deleterious to her credit score that she didn't appear to have a future with American Express.

	Ausman's story isn't uncommon. A 2007 Zogby poll showed that 37 percent of Americans have discovered incorrect information on their credit reports. Half of these people were unable to repair the damage.

	According to a January 2009 study by the National Consumer Law Center, about 25 percent of Americans have had their credit so damaged by such mistakes that they've had significant difficulty with credit-related transactions.

	There is a reason these glitches have surfaced. Loan denials and dropped creditcard accounts have risen during the recession. Creditors are watching consumers more closely, looking to jettison potentially toxic accounts as quickly as possible. They are reporting negative information more quickly, and responding to it more decisively.

	In Ausman's case, she had gone through this before. An erroneous bankruptcy had first appeared on her credit reports when her ex-husband filed in 2001. Although she had divorced him earlier that year, some company with outdated records had posted the filing to her credit reports as well as his.

	It took a year of struggle, but she finally got the entry removed from all of her reports. When it popped up again seven years later, she assumed she would be in for the same fight but would eventually prevail.

	This time, though, she's had no luck. Experian told her it never reported the bankruptcy to AmEx, and the bureau refuses to hear an appeal. Lisa Gonzalez, manager of public affairs for American Express in New York, declined to comment on the case. Roslyn Whitehurst, a public relations representative for Experian also declined to comment.

Domino Effect

	According to Ausman, that's not the worst of the damage. Even though her credit score is 780, other creditcard companies and banks have been raising her interest rates, often without notice, because of the error.

	Chase Bank has notified her that her finance charges will be increasing, and U.S. Bank has increased her interest rate from 5 to 15 percent. Steve Dale, a senior vice president of U.S. Bank in Minneapolis, would not comment on Ausman's case, and Chase Bank did not respond to requests for comment.

	"I've been paying on time, paying a lot more than my minimum payment," Ausman said. "Even after I lost my job, I was able to do this, but (the system) doesn't reward that."

	In fact, the system punishes it. While the largest factor in the credit score -- also known as the Fair Isaac Corporation (or FICO) score -- is payment history, a very close second is what's called credit utilization -- the ratio of debts to credit limits. A very low ratio of debt to credit is just as bad as a high one.

	While this does punish profligate spending on credit, it also discourages full payment of debts. The FICO score increases if a cardholder keeps spending on credit, paying the minimum balance, and taking as long as possible to pay off the full amount.

	An example of an ideal spender, in the metric of the FICO score, is one who has a relatively high limit on a creditcard, such as $8,000, but never approaches that much debt, using about $1,000 of his credit line and paying the minimum required, always on time.

	Steven Katz, director of TransUnion's consumer brand, wouldn't confirm or deny that the formulas used to determine credit scores are designed to reward spending, saying that only Fair Isaac could discuss their algorithms in detail. Stacey Stevens and Craig Watts, public relations representatives for Fair Isaac, declined to do so.

	Irresponsible spending habits, such as living beyond one's means, can be rewarded because the algorithms appear to value someone who spends on credit and doesn't immediately pay off the balance, accumulating interest and creating profit for creditors.

	But this same kind of behavior can also indicate a risky consumer with little financial acumen and weak personal assets, so the consumer can also be penalized.

	Similarly, responsible spending habits -- like paying more than the minimum balance and reining in one's spending -- can be rewarded, because they suggest a more responsible consumer. But this behavior can also sometimes be punished, because it means a consumer isn't utilizing credit to full capability, creating less profit for creditors.

	These inherent contradictions set up a spectrum of behavior with a limited middle ground.

Repayment Likelihood

	"A credit score is simply a number that represents the likelihood (that) a borrower will re-pay a debt as agreed," said Experian's Whitehurst. She stressed that the algorithms are not designed to encourage a specific outcome, but declined to discuss their effects.

	While some people struggle with the ramifications of their inaccurate credit histories, retired dockworker Gary Cortopassi from Anderson, Calif., has been wrestling with an error that appeared, then disappeared.

	In December 2008, TransUnion reported Cortopassi's score to U.S. Bank as 410. His score had been 760 a month earlier. In response to his suddenly low credit score, Visa dropped the limit on his credit card from $20,000 to $700, and the limit on his $33,000 U.S. Bank credit line fell to what he owed, $12,300.

	Not knowing why this was happening, Cortopassi was confused and indignant. But before he had a chance to investigate more thoroughly, he checked his report the following month and found that it was back to 760.

	He called a U.S. Bank underwriter who, upon Cortopassi's insistence, ran another TransUnion check and confirmed that the report showed 760. The underwriter told Cortopassi that he wasn't the first victim of TransUnion's errors, but that the credit limits could not be reinstated. Dale, of U.S. Bank, declined to comment.

	The damage to Cortopassi's credit score may be irreversible. Some claim that's common, in large part because of a computer program used to process the majority of complaints about credit mistakes. The program, called E-OSCAR, was developed by the three major credit bureaus, along with a fourth but lesser known company, Innovis.

	The bureaus say that it's the only efficient way to handle up to 20,000 consumer disputes per day, but consumer advocates question its effectiveness. According to a Smart Money study, the vast majority of complaints are simply forwarded to the company that originally reported the disputed debt.

	The most frequent response by the debt reporter is to deny the validity of the customer's complaint, and re-report the incorrect data, according to the study. Because the system favors the creditor's word over the debtor's, the information often goes unchanged.

	Whitehurst and Katz both disputed the allegation that debt reporters usually re-report the same information, but could not give any data to refute it. Both also emphasized the regulatory responsibility of information furnishers to tell the truth.

	"It is a violation of (the law) for a credit grantor to intentionally report incorrect information," Katz said. However, when pressed for details, he wouldn't provide any.

	There is, however, one way to ensure that a complaint is viewed in detail. According to the TransUnion employee handbook, complaints from politicians, legal workers, professional athletes, and entertainment celebrities are to be given special treatment. Katz could not confirm or deny this.

	But in response to the claim that TransUnion relies on a computer program and doesn't provide a human response, he said that "consumers can speak directly with a customer-service representative through our toll-free number about items they wish to dispute." Katz added that people can dispute claims online or via mail as well.

Live Agents

	"Experian uses live agents to convey the dispute to the data furnisher," Whitehurst said. However, she did not indicate that Experian uses live agents to investigate the data, and would not disclose how many it employs, citing corporate policy.

	In June 2009, FICO released a study showing that between April and October 2008, 16 percent of consumers saw their credit limits quickly and drastically cut, and have watched their credit scores drop as a result.

	Like Cortopassi, 11 percent -- or about 5 million -- of those whose limits were cut had good credit scores, according to the study. They committed none of the actions classified as "risk triggers," such as late payments, collection accounts, delinquent balances, and bounced checks.

	When a creditor files a report with the bureau against a consumer, the bureau informs the consumer, but does not check the report's veracity unless it is disputed.

	"When disputes are filed, Experian does check with the source of the information to verify its accuracy, and then sends the consumer an update," Whitehurst said. "If that consumer continues to disagree with the information, they have the option of adding a statement of dispute to the credit report."

	The information furnisher's word, however, remains the binding one. According to Katz, "All furnishers of data to TransUnion are vetted to ensure they meet highly stringent reporting criteria." He wouldn't elaborate on the criteria.

	Although many consumers feel that they have no means to fight the credit system, options do exist, including the courts. In 2006, the number of lawsuits against credit bureaus began growing.

	Despite this, Whitney Huston, a consumer law attorney with the Sturdevant Law Group in San Francisco, doesn't think that will lead to more class actions.

	"Despite what the public perception is, class actions are not that easy to bring," Huston said. She said "there are issues with proving claims and getting information from companies. There are issues with whether they're actually breaking the law, because the Fair Credit Reporting Act is pretty favorable to the bureaus."

	Huston calls for changes to federal credit law, and for sweeping credit reforms to give consumers more control of the system and make it easier to file and win complaints. "The (credit law) could be reformed to increase the availability of information to the consumer, and make it easier to bring a class action," she said.

	"You can improve the level of liability in the law," she continued. "You can improve statutory damages, so that if the agency makes a mistake and you can prove there's a mistake, then there's an automatic fine for damages."

	Most importantly, according to Huston, the law needs to make it easier for consumers to prove a dispute. Currently, "what the consumer has to do is write a letter and provide verification, and even if the consumer provides verification, if the company has its own verification, then the company trumps" it.

Canadian System

	Some point to the Canadian credit bureau system as a possible model for reform. Canadian credit bureaus must submit all materials and evidence produced by the consumer to the original information furnisher as part of the complaint process -- something American companies aren't required to do.

	If an entry on the report is discovered to be false, the bureau is required to immediately update all entities to which it had provided erroneous information. In perhaps the most important difference between the two systems, Canadian credit bureaus must remove information, whether it's valid or not, if it can't be verified.

	Aside from legal recourses, the options for fighting American bureaus are largely self-initiated and self-propelled.

	There is a little-known line of defense called the security freeze, which allows consumers to deny any potential creditor access to their credit reports. Bureaus are required by law to offer the service in every state except Michigan, Missouri, and Alabama.

	The service was originally envisioned as a method for stopping identity theft, but it can also be used as damage control while a consumer works on a complaint, disallowing creditcard issuers and banks from accessing the reports, and from raising rates and fees because of false negative entries.

	In addition, the Federal Trade Commission is asking the public to help overhaul annualcreditreport.com, the credit-checking site sponsored by the three major credit-reporting bureaus -- a move that may signal the agency's desire to consult with consumers on a broader range of credit bureau issues.

	Still, the major credit bureaus have a strong opinion about the cause of the problem. Katz said several times that he believes most credit-scoring disputes are the result of people either intentionally or accidentally misrepresenting their true credit histories. Whitehurst, of Experian, went so far as to state, "There are no mistakes here."

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SIDEBAR: Understanding Your Credit History

	The rules for determining credit history were standardized with the advent of the FICO scoring model, created in 1958 by Fair Isaac Corporation. The FICO formulas are algorithms that take many facets of a consumer's financial life into account. There are five major categories according to FICO:

-- Credit utilization (the ratio of debt to available credit)

-- Payment history

-- Length of credit history

-- Types of credit history

-- Recent credit history

	Today the three major bureaus are Experian, Equifax, and TransUnion. Credit bureaus receive reports on consumers' debts and payments from creditcard issuers, landlords, and lenders, and plug them into algorithms.

	The resulting FICO score is measured on a scale of 300 to 850. Various sources list the average score as in the high 600s, and the median score as 723. Those scores are sold to any entity that asks for them as a credit report.

	The credit report usually takes the form of a document breaking down the reasons for the all-important score assigned, and may be the most crucial document about a consumer's finances.

	A low credit-rating means that the best banks, creditcards, loan programs, and even employment and housing opportunities are off-limits. Low credit-scores are difficult to escape; in fact, because a low credit-score can send people to more predatory lenders, low credit-scores often prompt a downward spiral into financial ruin.