The Main Thing You Probably Don’t Understand About Credit Reports

The Main Thing You Probably Don’t Understand About Credit Reports

What do you think of when you hear the word “file?” If you’re older, you probably picture a manila file folder suitable for holding paper of some kind. If you’re younger, a computer file may come to mind. The word “report” might conjure up a school project or a formal written document—perhaps of a legal, medical or business nature.

It’s understandable that when consumers hear the words “credit report” or “credit file” they picture something that may not be entirely accurate. Their misconceptions about what those terms mean can create confusion when they review their credit or dispute errors.

A few decades ago, credit reports were often maintained in file folders filled with records and notes of how someone paid their bills. Sometimes they even contained newspaper clippings describing events like a person’s wedding. But the combination of computerization and consolidation in the 1970s led to the system we have today.

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Credit reports are basically a combination of bits of data, and the credit reporting agencies have to sort through that data to make sure it is correctly associated with the right person, and that it isn’t out of date or inaccurate.

It’s no small feat. As the Consumer Financial Protection Bureau (CFPB) explained in a research report on consumer credit reporting agencies.

“Each of the NCRAs has over 200 million active files on individual consumers…The average credit file contains 13 past and current credit obligations, including nine bank and retail cards and four installment loans (e.g., auto loans, mortgage loans, student loans). In a typical month, an NCRA receives updates on over 1.3 billion trade lines. With this much information included in and added to their databases, the NCRAs face technical and operational challenges in attributing information to the proper consumer’s file.”

The report also describes two primary ways credit reports are organized.

PIN-Based System

This is the system used by two of the three major credit reporting agencies (unnamed in the CFPB report). In this system, each piece of data is assigned a PIN associated with an individual. Then the bureau must match each piece of information to the correct consumer based on personal information. What most people don’t understand with this system is that a credit report is not assembled until it is requested. It’s explained in the report this way, “When a consumer report is requested by a creditor or a consumer requests a credit report, the (credit reporting agency) assembles the consumer report in real-time using the PIN as the central link to the different databases.”

Flat File System

One of the major credit reporting agencies uses what’s referred to as a “flat file system,” where each individual has a report and information coming into the system must be associated with that individual’s record. This is more similar to the type of file many consumers have in mind, but it’s not immune to errors.

One of the problems is that more than one file— or a partial file– may be created for an individual who changes names after marriage or divorce, moves etc.

Business Credit Reports are Different

The CFPB did not address commercial credit reports in this study. However, these bureaus vary in terms of the way they collect and report information. It’s much easier for companies to report information about customer’s payment histories to business credit bureaus, for example, and these agencies accept information in a wider variety of formats. The ways information is presented in business credit reports is different as well: for example, the report will not list the name of each creditor that reports.

What does all of this mean for you?

1. Credit scores can change very quickly. As just mentioned, under the “PIN” system a credit report is assembled when it is requested. But in the case of credit scores, they are always created when they are requested. Let’s say you max out a credit card. As soon as that new balance is reported to the credit reporting agency, any new credit score created will be based on that information.

2. You can get a fresh start. When information like a bankruptcy or tax lien can no longer be reported due to federal laws (laws that apply to personal credit reports, but not to business credit reports), it will no longer be part of the report. It’s as if it didn’t exist. In the summer of 2017, millions of tax liens and judgments were removed from consumers credit reports, for example, and that information is no longer associated with those credit reports.

3. Mistakes can happen. As mentioned earlier, billions of pieces of information are reported to the credit reporting agencies. Information may be associated with the wrong person. The CFPB report points out, for example, that at the time of the 2000 U.S. Census there were 2.3 million Americans with the last name of Smith, 1.8 million with the last name of Johnson, and 850,000 with the last name of Garcia!

Ultimately, consumers and business owners are the only ones who can look at their credit reports and know whether they are accurate. If you haven’t seen yours in the past year, take a few minutes to review your credit and see whether it is accurate and complete.

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