Is There Such Thing As An Accurate Credit Report? I Don't Think So.

There are three major credit reporting agencies (aka credit bureaus) in this country.  And, each of the three claims to house approximately 250,000,000 consumer credit files.  Basically if you're 18 and have ever applied for credit then you’ll have a credit file.  That’s roughly 750,000,000 credit files, right? 

I'm announcing here and now that that I believe that the vast majority of them contain inaccurate information.  That's quite the condemnation of the credit reporting system.  I better be able to back this up.  Here goes…

The information on our credit reports comes from multiple sources.  However, the majority of the information comes from lenders where we've applied for credit.   

After your application is approved (hopefully) the lender opens an account in your name.  Within roughly 45 days that account could appear on your credit reports.  Here's where the trouble begins and my argument starts to take shape.  I believe that there are two fundamental problems with the credit reporting system in the U.S the lead to inaccurate credit reports.

They are…

1. Reporting Is Voluntary – There is no law or requirement forcing lenders to report your information to the credit bureaus.  Since there are no rules, lenders can pick and choose whether or not they want to report your accounts to any of the credit bureaus.  Fact is, many lenders will report your accounts to less than all three. 

This is a huge problem because some or all of your credit reports could be missing that history of responsible credit management on your accounts.  As such, I would argue that the reports that are missing the account information are inaccurate.  A credit report is supposed to be a record of your credit obligations and how you've managed them.  Having less than all of your account information simply because the lender chooses not to invest in reporting to all three bureaus is inexcusable. 

Why else is this a problem?  A significant percentage of us have had credit problems (either in the distant past or more recently).  These credit problems hurt our credit scores and make it harder for us to get the best offers made by lenders.  The voluntary system hurts us twice here. 

First, any missing positive account information isn't able to offset negative account information.  While it isn't an even swap it's fair to say that having good accounts on your credit reports will help to diffuse the negative impact of bad credit.

Second, the best way to rebuild your poor credit is to establish new credit and begin showing that you can manage it responsibly.  Credit scores love to see this.  However, if you establish credit with lenders who don't report to all three bureaus then you'll never get the full benefit of your good credit.  This also applies to young consumers who are trying to establish credit for the fist time.  If they open accounts with lenders who don't report then they won't be doing anything to build their credit.

So why don't all lenders report to all three?  There are several reasons why they don't all report to all three.  As soon as a lender reports accounts to the credit bureaus they fall under various Fair Credit Reporting Act (FCRA) requirements.  These requirements include verifying account information that is disputed by consumers.  This takes employees and time and, therefore, is expensive.

Second, by reporting accounts to the credit bureaus the lender then opens themselves up to potential liability for damages or noncompliance with the FCRA.  This means lawyers and research and, therefore, is expensive.  Are you seeing a trend here?

Third, lenders have to have an account with a credit bureau before they can report account information to their credit file databases.  The credit bureaus are all for-profit companies and they aren't going to include a lender's account information for free.  There are costs involved with having an account with any of the credit bureaus.  Some lenders don't want to pay those fees three separate times each month.

And fourth, transmitting account information to the bureaus takes very specific technical know-how and hardware.  Without getting into it and boring you to death let's just say that it's, again, expensive.    

Loophole?  I already know what you're thinking. "What if I miss payments on the account that isn't reported?  It will never hurt my credit, right?"  Wrong.  It's amazing how fast the lender will start reporting your account when you start missing payments.  And, if you go really delinquent they'll assign the account to a collection agency and that will most definitely go on your credit reports…all three of them.

My Conclusion – Any credit report that is missing any of your accounts is an incomplete report and not a true and accurate representation of your credit history.   
      
2. Credit Report Lag Time – What's lag time?  Simply put, lag time is the amount of time between when you make a payment on an account and when that payment is reflected on your credit reports.  This lag time can be 60 days in some cases.

This is a huge problem because essentially every account on your credit report reflects information that's between 30 and 60 days old.  This makes it more difficult for credit scoring models to generate a truly accurate and up to date score.  This is because they "score" whatever is currently on your credit reports.  But, in our current system all scores are generated based on credit information that’s at least 30 days old.  It's not the end of the world but it would be nice to feed the most up to date information into the scoring models.  Us consumers deserve at least that much.
 
Go get your credit reports.  It doesn't matter from where.  Look at the date called "Date Reported" or "Reported Date."  This date will almost always be last month or older.  Your balance will correspond to the statement that you got that month. 

What this means is that if your balances on credit cards, auto loans, mortgage loans or any other loans has decreased significantly (or been paid in full) within the past month then your credit reports and your credit scores won't reflect it.  This is especially problematic for consumers who are close to making a major purchase or are working to pay down debt in an effort to improve their credit scores.  Just because you pay off your credit cards today doesn't mean that it will show paid in full on your credit reports…ever.

That's right.  This lag time has an unintended consequence to people who pay off their credit cards in full each month.  By the time your account payment is received, processed and updated at the credit bureaus it's almost certain that you've used the card again for something else.  So, even though you pay the card in full each month your credit reports will never show a $0 balance unless you don't use the card for 60 days after you paid it off.  Seriously.

I was having a heated debate with a friend of mine who works at one of the credit reporting agencies recently about this lag time and the effects on consumers.  His argument was that this is the way it's been for decades and that it would cost the credit bureaus billions of dollars to revamp their systems to dynamically update (update in real time).  And, since this is the way it's been for decades that lenders, consumers and credit score developers are use to seeing data that's based on the previous update. 

Ok, fair enough.  I'm all about saving money but I think there's so much room for improvement here. 

My argument is that when I go to the mall and buy a pair of $40 jeans everyone BUT the credit bureaus knows about it.  My credit card company certainly knows about it because they had to approve and process the transaction and then subtract $40 from my credit limit.  This all happens in real time.  But, it's going to take almost 2 months for that purchase to be reflected in the balance on my credit reports.  I’ll have already outgrown the jeans by then.

My Conclusion – Until the credit bureaus update their databases in real time just like the rest of the world then this lag time results in outdated information on credit reports.  As such, they are inaccurate.  And, the credit scores that are generated on this outdated credit information are not a true and accurate representation of my credit risk.  They are a true and accurate representation of my credit risk from 60 days ago.

I’d love to hear your two cents on the matter.  Do your reports have account information from 30-60 days ago?  Even older?  Do they show that your credit cards are paid in full each month? Share your two cents in the comments section below!