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Credit Scores Can’t Be Trusted
By Ed Hlavac, CTX Mortgage

Credit scoring has taken over the world of mortgage lending and made inroads into other areas such as insurance and housing rentals. Just a few years ago a borrower would be evaluated by a human being and payment history carried most of the weight in the decision. Now an "objective" score is generated and uses a much more complicated formula for assessing risk. However, and it is a big however, computers can’t recognize obvious errors or read explanation letters. A recent study by Consumer Reports Magazine found errors in nearly half of all credit reports. The errors seemed to occur with equal frequency and severity among the three major credit bureaus. Some may be benign errors of little consequence but the more serious errors could mean denial of credit or more expensive terms. On a mortgage, this could mean thousands of dollars of unnecessary expense.

"Unfortunately, most consumers still do not know the basic facts about credit scores and their financial significance," says Stephen Brobeck of the Consumer Federation of America. In a recent survey only 27 percent of consumers understood that credit scores measure risk to lenders. In fact, the FICO score assigns a numerical value to the likelihood of you paying a loan back on time. A higher score equals less risk and better terms.

The three bureaus, Experian, Equifax and Transunion collect data from creditors and create a report of current and past payment history, types of creditors, length of history, and balances relative to available credit. A complicated mathematical formula assigns a number based on millions of previous consumer reports. Talk about profiling!

Most lenders establish rules placing the first emphasis on the credit score. So what if it is riddled with errors? Are creditors confusing you with someone with a similar name or social security number? Was the account dispute in question settled but remains showing as past due or sent to a collection agency? Did the insurance company fail to pay the emergency room bill? Did the creditor that was discharged in a bankruptcy report the debt as still outstanding and with a past due balance? These are common problems that I see all the time.

You can take steps to improve your score. Credit reports list the top four factors that are affecting your score. Look for errors first, then see what can be done about improving the four factors, such as, paying down balances. It takes up to 60 days to challenge a mistake through the credit bureaus and is free. Mortgage lenders have a process to correct entries and correct the score in as little as three days for a small fee.

Bottom line: keep up to date on your credit history. Take corrective action immediately whenever issues arise. Confirm all creditor communications in writing. Some resources to help are "Do It Yourself Credit File Correction Guide" and "Consumer Guide to Good Credit" which should be available from local bookstores.

Ed Hlavac