Consumer Reports magazine September edition has a special report on how insurance companies use (really misuse) credit scores in determining how much to charge you for your car insurance. Each insurer cherry-picks about 30 of almost 130 elements in a credit report to come up with its own proprietary score. That score will be quite different than your FICO score. Customers with low credit scores are made to pay a lot more than customers with better scores. For example, a single driver in Kansas who incurred one moving violation would get an increase in his premium of $122/year, but if his credit score was only “good,” the increase would be $233 and a poor credit score would add $1,301 to the premium on average! In another example, a single adult Florida driver with excellent credit may pay $1,409 on average for insurance as compared to $1,721 if the driver had good credit, and a whopping $3,826 for a driver with bad credit.

Insurance companies don’t tell customers how they have been scored. Consumer Reports found that this all started in the mid 1990s when some insurers began working with Fair Isaac Corporation, the company that created the FICO score, on the theory that scores might predict claim losses. (Query whether there is a correlation between low credit scores and claims made). By 2006, almost every insurer was using credit scores to set premiums. Fortunately for drivers in California, Hawaii and Massachusetts, these states prohibit insurers from using credit scores to set pricing. What’s unfair about this practice is that customers with low or even good credit scores pay for accidents they have not caused and may never happen. Plus, good drivers who have good driving records get penalized big time! Every state should ban insurance companies from using credit scores. The use of credit scores by car insurance companies surely is just an excuse to overcharge consumers. And why no transparency? Why don’t insurance companies let consumers know their credit scores?

Does having too much credit hurt your credit score? Should you close credit cards to reduce your credit available? These are questions addressed by Barry Paperno a contributor to creditcards.com. Conventional wisdom 20 years ago was that if a borrower had access to too much credit, he or she would be tempted to use too much credit and get in trouble. But in the 1980s, FICO did a study and found that there was no evidence that having “too much” credit would change the consumer’s behavior. The same research confirmed that open long-held cards in good standing are associated with lower credit risk. However, some mortgage brokers still cling to the myth that a borrower may have too much credit.

The number of cards a person’s hold is a minor factor in credit scoring. Closing them won’t change the number. Positive payment histories remain on credit reports for up to 10 years. FICO publishes a profile of common attributes of persons with scores greater than 785 which is interesting.

 

 

The American Banker magazine has an article that asks “Can credit bureaus can finally be tamed?”

The article describes a “tough fix-it order” imposed by federal and state officials that was supposed to force the bureaus to clean up inaccuracies and better respond to consumer complaints. But that happened 25 years ago and the problems with the bureaus persist.

The article notes that lawyers, advocates and regulators agree that problems of accuracy and how disputes are handled continue to be problems. In 2012 the FTC found that one in four consumers have potential mistakes on their credit reports and one in 20 may have errors significant enough to negatively impact how much he or she pays for a loan, or whether credit is available. That means 11 million consumers have material errors on the reports that may affect whether they can get a mortgage loan, a car or even a job. In 2014, the Consumer Financial Protection Bureau received 45,000 complaints about the credit bureaus.

Consumers have a right to dispute inaccurate or misleading information on their credit reports. The problem is the process does not work very well for consumers. Chi Chi Wu of the National Consumer Law Center describes the dispute process as a “Kafkaesque.” Instead of conducting substantive investigations when consumers lodge a complaint, the bureaus have typically relied on an automated system that boils down concerns into two- or three-digit codes that are sent to the creditors and others (the furnishers). Those furnishers often do little more than check to see if the data in their systems matches what’s in the report and, to compound the problem, the credit bureaus typically accept whatever the furnishers say.  This practice, known as “parroting” is contrary to the dictates of the FCRA.

The three credit bureaus makes tons of money selling consumers credit monitoring and education products. In this business, the bureaus profit from consumer insecurity about stolen credit information and identity theft. Those fears, along with general concerns about credit reporting errors, drive the sale of monitoring products, which go for as much as $19.95 a month. The products can provide a false sense of security because they only monitor certain kinds of fraud. Experian boasted in an investor presentation in May that consumer monitoring and identity protection accounted for 21% of revenue last year. Equifax, meanwhile, reported to the SEC in April that its “personal solutions” segment — products sold directly to consumers, including monitoring services — earned the company over $65 million, about 10% of total operating revenue for the first quarter of 2015.  In this way, the agencies profit from their own inaccurate information.

A major change is that the industry now has oversight from the Consumer Financial Protection Bureau. The CFPB vows to force changes in the industry to protect consumers. One CFPB investigation is apparently underway concerning the industry’s sales of credit scores and credit monitoring products. Equifax disclosed to the SEC some months ago it received a civil investigative demand from the CFPB back in February 2014 “as part of its investigation to determine whether nationwide consumer reporting agencies have been or are engaging in unlawful acts or practices relating to the advertising, marketing, sale or provision of consumer reports, credit scores or credit monitoring products.” Experian told analysts last summer that it got a similar request.

 

One day this past March, Ms Katie Manning, who lives in Maine, came home and found her mailbox stuffed with more than 300 envelopes, each containing an Equifax credit report on 300 individuals! None of them had anything to do with her.

A TV station in Portland, Maine referred her to the Maine Bureau of Consumer Credit Protection.  She turned the reports over to the Bureau. The Bureau sent them to Equifax’s attorneys.

Manning had requested her own credit report from Equifax earlier that month. She told the station representative she knew she was “not supposed to have this information” and that “someone has messed up.”

Equifax Vice President of Corporate Communications Tim Klein told the TV station, “This is a high priority. Obviously this is a serious situation. I’m going to get our security and forensics teams involved.”

The three national credit bureaus have agreed to improve the way they handle consumers’ requests to correct inaccuracies on their credit reports. The bureaus will also change the way they report on unpaid medical bills.

The agreement is a result of an investigation by the New York Attorney General. Under the agreement, the bureaus will be required to use trained employees to review the documentation consumers submit when they believe there is an error in their files. If a creditor says its information is correct, an employee at the credit-reporting firm must still look into it and resolve the dispute. However, and this is a severe limitation, the new and improved investigations only apply to instances of fraud, ID theft and mixed files. Most errors do not fall into one of these categories. How well these changes will be implemented is an open question.

The way the bureaus handle the vast majority of cases is that they merely parrot whatever the creditors say thus perpetuating errors. The Consumer Financial Protection Bureau found that 85% of disputes were referred to the creditors meaning the bureaus did not conduct meaningful investigations as required by the FCRA.

The bureaus will say they will make changes in the way they report on unpaid medical debt.  The changes may be significant given that 43 million Americans have past-due medical debt on their credit reports and  52% of all debt on credit reports is from medical expenses according to a CFPB study. Collection agencies typically report medical debt to the bureaus on behalf of doctors and hospitals. In many cases, the debts are unpaid because an insurance company has failed to pay debts for which they are liable. Under the agreement, the credit-reporting firms will  wait 180 days before adding medical debts to consumers’ credit reports. During that period, consumers will have time to clear up discrepancies and catch up with other unpaid bills. When medical debts are paid by an insurance company, regardless of the time frame, they will have to be removed from the credit report soon after.  However, it is a pretty rare event for a medical insurance company to pay a debt over 6 months old.

 

 

FICO announced it will make up to 18 variations of consumers’ FICO scores available for the first time.

FICO publishes different scores based on the needs of the type of credit involved–car loans, mortgages, credit cards, etc. Before, FICO allowed consumers to see only their “base” FICO score at the firm’s subscription-based MyFICO.com site, or through the free FICO Score Open Access program used by some credit card issuers. Those scores are not the same scores used by lenders when they make credit decisions.

Now, the company will offer up to 10 additional FICO score versions — five will be based upon Equifax data and five will be based upon Experian data. Scores based on TransUnion data will be added later. “By making these scores available along with FICO Score 8, we have created the most complete consumer credit score product ever available, and set a new standard for consumer empowerment,” said Jim Wehmann, executive vice president for scores at FICO. The 18 FICO scores to be available are used in 92% of lending decisions using any FICO score according to the company. “In other words, if you are applying for any type of loan, the chances are overwhelming that one of these 18 scores is being used,” FICO spokesman Jeff Scott said.

The catch? Getting scores from MyFICO.com  requires a monthly subscription to the site  starting at $24.95 per month for a minimum of three months — or a one-time purchase for $59.85.

According to a post in today’s edition of Credit.com, consumers may be surprised to find variance among the scores — let alone surprised at the number of different “grades” they might receive for their credit history. Consumers can get two of their credit scores for free on the Credit.com site along with information on how your scores compare to the average American and personalized advice for improving it.

Most people are familiar with Experian, Equifax and Trans Union, but there are many more credit reporting agencies (CRAs) that are unknown to most people. The Consumer Financial Protection Bureau has published a list of all the CRAs. The publication lists the CRAs that provide free personal consumer reports with their latest company name and report request information, information consumers may use to link to the Bureau’s original content. It also provides names of parent and subsidiary companies so readers can research company names in the Bureaus Consumer Complaint Database.

The list has its own web page, and also appears in the following pages:

 

The Consumer Financial Protection Bureau (CFPB) released a report that reveals that over 1 in 5 consumers, or 43 million, have black marks on their credit reports for medical debts, and that medical debts constitute over half of debt collection items on credit reports.

Chi Chi Wu of the National Consumer Law Center said  “This report is another example of the powerful information revealed by CFPB’s groundbreaking research.”

Medical debt is different from other types of consumer debt. Medical debt is unique because the most vulnerable patients – the uninsured and underinsured – are often billed “chargemaster prices” which are much higher than prices charged to private and government insurers. Many of these may be eligible for charity care from a hospital or insurance coverage such as Medicaid.

Ms Wu said the CFPB should take steps to protect consumers from the harms caused by medical debt collection by:

  •  examining the  larger medical debt collection agencies;
  •  requiring debt collectors to give consumers a notice before placing or “parking” medical debt on their credit reports;
  •  require that consumers be given time to deal with insurance disputes or billing errors, or to apply for financial assistance or charity care, before a debt can be reported to a credit reporting agency;
  • preventing damage to a consumer’s credit score from medical debts that are disputed or result from billing errors; and
  • prohibiting debt collectors from dunning low-income consumers for inflated chargemaster prices.

Pending in Congress is a bill that would help the 43 million consumers facing medical debt, the Medical Debt Responsibility Act, H.R. 1767/S. 160. The bill would require credit reporting agencies to remove paid or settled medical debts from credit reports.

One helpful change is that the credit scoring developers FICO and VantageScore have made changes to their scoring models to reduce the impact of medical debt. One problem is that Fannie Mae and Freddie Mac require the use of an older FICO scoring model that does not include this change so currently those applying for mortgages who have medical debt on their credit reports won’t be helped. Consumer groups led by  NCLC advocates have asked the regulator for Fannie Mae and Freddie Mac to update their credit scoring formulas.

 

The January 2015 issue of Consumer Reports has an excellent article on credit reports. It is especially useful for any consumer who discovers a problem with his or her reports, but does not know how to begin to fix the problem. The article has specific advice on how to dispute errors in the reports. It also describes what goes into consumers’ credit scores and ways to rehab your credit score.

Last night, Michael Finney of Channel 7 in San Francisco interviewed our client Lisa Allen about her experience with the credit reporting agencies. When Lisa was just a child, the Social Security Administration mistakenly gave her social security number to the guardian of a another Lisa Allen who lived in another state. The mistake occurred because their names were the same and their birthdays were only ten days apart. As the two Lisas went through their teen years, Experian, Equifax and Trans Union mixed their credit files meaning the other Lisa’s credit files were mixed with Lisa of Fremont’s files.

To make matters worse, the other Lisa’s credit was terrible with a foreclosure, a repo of a car, and numerous bad debts. Beginning in 2008, Lisa of Fremont began asking the credit agencies to unmix her file. She got nowhere with Experian and Equifax. Trans Union unmixed her file but only after years of its report impacting her ability to get credit. The effect of all this mixing was that Lisa could not get credit in her own name. We filed the a  lawsuit in in the federal court in San Francisco alleging violations of the Fair Credit Reporting Act. The case settled in 2013. For the Channel 7 interview go to www.abc7news.com.