Is the system of credit ratings fair?

No

1 of 12

by Gail Kerry

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Our present credit rating system is in need of a complete overhaul, not a minor repair. Presently, lenders are able to supply erroneous information to credit bureaus practically overnight without providing notice to the credit holder. No documentation or supporting evidence is required or supplied with the negative credit information. Currently, even disreputable companies are engaged in supplying credit reporting agencies with false information for profit, counting on the fact that small amounts ($39 or $45 in some cases), will simply be paid when the credit holder is prevented from obtaining new credit. If this sounds incredible, it isn't.

Present laws allow unethical collection agencies to set up shop and immediately begin damaging your credit. A few notorious firms are engaged in purchasing collection accounts from the medical community including private medical practices. Legitimate bills for services rendered may have been delayed due to health insurance reimbursement processing and eventually paid. Nonetheless, these firms have purchased the collection accounts and continue to report damaging information to the credit reporting agencies. It seems that this would be an easy matter to clear up but it's not. By the time the public catches on, they have closed one corporate entity and set up shop somewhere else. As a credit holder, if you get caught in one of these vicious credit scams, it's easier to pay something you don't owe than allow it to remain on your credit. The credit reporting agencies do nothing to ensure the accuracy of data that the collection agencies report, nor do they perform any type of background checks on the unscrupulous companies that are preying on the good credit of private citizens.

Imagine applying for a home loan and just when you are trying to lock in a rate, finding out that there's a serious blemish on your credit report but you know that it's not yours. That situation happened to me. I requested a copy of my credit report from the credit reporting agency and obtained a contact number for the creditor which I purportedly owed money to. When I phoned the collection agency, they simply confirmed that it was my bill even though I had never been to the radiology clinic that they were collecting for. I disputed the bill with the credit reporting agency to no avail. It remained on my report and I had no choice but to stop the loan process or pay a 1.5% higher interest rate due to a large open collection account which was not mine.

Months later, I was finally successful in getting the information removed (from one of three credit reporting agencies) after obtaining assistance from the Attorney General's Office located within the state in which I reside. It turns out that this collection agency (located in another state), did not even have my correct social security number. The credit reporting agency did not require this information from them prior to permitting them to damage my credit and ultimately ruin my opportunity to refinance my home. Words simply cannot express how angry and frustrated I was over this situation. How can a company simply ruin your credit overnight without repercussion? Evidently it happens all of the time. Neither the collection agency nor the credit reporting agency suffered any consequence as a result of my continuing to pay $120 more per month on my mortgage.

There are worse stories than mine, however. Identity theft is rampant nowadays and innocent people have suffered as a result. Can we improve the system? Yes we can. Here are a few suggestions to start with:
Legitimate negative credit reports must include documentation at the time of submission to credit reporting agencies.
Copies of negative information including supporting documentation must be supplied to the credit holder simultaneous with submission to the credit reporting agency.
Credit holders should be entitled to a thirty day period to review and respond to negative information prior to a record being placed on their credit file.
Only accredited (licensed and regulated) collection agencies and lenders should be permitted to use the system. In order to be licensed, legitimate firms must provide (at minimum), copies of their business license, Tax ID #, banking information, location, contact number and address to the credit reporting agency. This information must be updated immediately if there are any changes. These firms should also be required to deposit a "bond" as restitution to credit holders for supplying false or misleading information which may cause financial harm to the credit holder. These companies need to be regulated in much the same manner as real estate agents.
Credit reporting agencies must be more proactive and communicate with reporting firms annually to update information. If reporting companies cannot be contacted by telephone, their corresponding negative report should be removed.
Social security numbers should not be shared between credit reporting agencies and lenders. They should only be used to confirm or verify the credit holder.
There is no doubt that a legitimate system of verifying a person's credit is required in order to satisfy lending requirements. An improved credit reporting system would take into account prior positive (or negative) credit history as well. This needs to be accomplished through a method of averaging the current year's report with prior years. If this were implemented then a recent negative activity would only affect a component of the total score. This approach is similar to income averaging in federal taxes.

Consider that a person's score is currently 700, which is pretty good. Suddenly a credit card company lowers their credit line, which is happening more frequently now due to lender problems more than credit holder issues. If a credit line previously had ample credit available and currently has none due to the lower credit line, the credit holder's score would drop considerably, possibly as low as 650. An averaging situation would result in two scores a current 650 and an averaging score of 690 (which is 700 x 4 years, plus 650, divided by 5 years). This type of system provides a more accurate picture of the overall good credit holder history, but still takes into account a currently lower credit score.

The current mortgage meltdown probably would have been averted if a system was utilized which took prior history into account. New homeowners were able to purchase mortgages they couldn't afford because the present credit rating system approved their creditworthiness based only on current data instead of taking an average historical approach.

These are just a few ideas which should be considered, but overall many improvements are needed. Any system of rating credit that disregards or provides negative information on behalf of people with little or no debt needs drastic repair or we will all be in serious financial trouble in the future.

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