Why you're burned for actually being financially responsible
The credit score system and how reporting works is complex – and the formulas the big three credit reporting agencies (Experian, TransUnion, and Equifax) use to calculate credit scores are all different and all secret. But one thing that isn't a secret is that they are all FOR PROFIT businesses. And that plays big time into why you're burned for actually being financially responsible.
You're down before you even start because credit reporting agencies are not in business for consumers. They are absolutely in business for lenders. That's why they are so quick to report negative items (accurate or not) and so slow to report positive items. Randy Padawer, Community Education Specialist for LexingtonLaw.com, states it this way, “The credit reporting system is gamed toward rewarding lenders, not rewarding consumers.”
Padawer is right. You'd think consumers who've paid off responsible loans like a mortgage or student loan would be rewarded with better credit scores – and thus offered better rates on future loans – but they're not. Instead, responsible consumers often have a lower credit score than someone who is, frankly, operating in a risky financial pattern. Why? It all goes back to the money.
Credit scores are calculated to favor unsecured, revolving credit (mainly credit cards), for one simple reason: they have a much higher interest rate than other loans. Consider the interest rate difference between a credit card of 18-23% and a mortgage at 3.5-4.75%. Lenders are out to make money, and they'll always take the risk of unsecured credit to make more in interest. Why do you think credit cards are pushed everywhere you turn? Lenders and credit reporting agencies want you to carry high-interest debt.
Not only that, Padawer points out that you aren't rewarded with a higher score for responsibly paying normal expenses on time month after month, such as rent, your cell phone, utilities or cable. In fact, those typically aren't reported at all – unless you miss a payment or have a payment not post correctly – then it is reported. This results in negative items often being reported more consistently than positive ones.
The burn is that we live in a society where your credit score affects nearly everything. Beyond just affecting a mortgage interest rate, it can affect getting a cell phone or getting a new job. We're trapped in a system that doesn't favor the consumer, so how can someone who is financially responsible improve their credit score?
Negative errors are very common – so get errors and unfair items fixed right away. Padawer states that the consumer does have the Fair Credit Reporting Act – among a large number of other Acts – on their side. They were all written to protect consumers. He points out one common, and abusive misinformation, that is perpetrated all the time: That is when consumers are told that even unfair or inaccurate things must stay on someone's report for 7 years by law. That is absolutely FALSE. Credit reporting is not mandated in the United States. The truth is that 7 years is the maximum amount of time negative items are allowed to stay, but there is no minimum amount of time. And if the reporting agency cannot prove an item is accurate? It is required to remove that item.
Some common and unfair errors that credit reports have:
– being mixed up with a person with a similar name, so debt they have is wrongly listed as possibly being yours, thus negatively affecting your score
– incorrect previous or current address
– incorrect account balances and even balances remaining for accounts you already paid off
– numerous open accounts that should have been closed
– fraudulent open accounts
– medical bills you were led to believe were covered by insurance but were actually sent to collections. Even worse, one bill can be bought and resold to collectors numerous times. Then it's reported for each collection agency as a separate bill – resulting in multiple lines over one bill
Two uncommon errors a few credit reports have:
– Access by unauthorized viewers. You control who you authorize to view your credit report. If you see inquiries from sources you didn't inquire about, that is a sign of fraud.
– A completely zero score when you've had credit before. Although very uncommon, it does happen. It happened to a friend of mine. This can occur when someone with whom you previously held a joint account passes away and their score zeros out. If you're still connected in some way by the credit reporting agencies (such as by similar names or co-signed loans), you can have your score completely drop to zero.
Finally, be very careful if you are seeking help with properly adjusting incorrect and unfair reporting, getting your true FICO score, and improving your credit score. NEVER go to an agency that is ultra-cheap and “guarantees” results. Those are huge red flags and your credit score can end up burned even worse.
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