Credit Reports Are Confusing but That’s Not the Bad News

When you apply for a home loan today, your chances of getting it may depend on how you do on a complex mathematical test that you’ve probably never heard of and are unlikely to ever see.

Lenders are increasingly making use of so-called credit scoring to predict, for example, a would-be borrower’s likelihood of declaring bankruptcy within the next two years or a consumer’s future payment pattern.

The three major national credit reporting companies--TRW Information Systems & Services, Equifax Inc. and TransUnion--use somewhat different computer models for credit scoring. Some big credit-card companies and mortgage lenders also have their own models and scoring systems.

Your ability to get a loan in the San Fernando Valley or Ventura County could very well rest on the information contained in databases in Atlanta, Chicago or elsewhere.

“It’s a mystifying area even to people who are familiar with it,” said Richard Pittman, director of counseling at the nonprofit Consumer Credit Counseling Service of Los Angeles. The organization, which offers free credit-related counseling to the public, has 16 offices in Los Angeles County, including Burbank and Tarzana.

CCCS recently called the three major credit reporting companies for some answers about credit scoring and credit reports generally. “Our representatives called all three bureaus and got three different sets of answers,” Pittman said. “There are so many questions that they aren’t giving good answers on.”

A 1994 survey by members of the National Assn. of Independent Credit Reporting Agencies examined a random sample of 1,700 credit reports on mortgage applicants and found that 16% contained erroneous derogatory information about the applicant’s credit history. Another 3% contained charge accounts and other debts that didn’t even belong to the applicant, and 2% erroneously claimed that tax liens and court judgments had been issued against the applicant.

Derogatory information on your credit reports can hurt you when a banker reviews your home loan file. It can also affect you when various derogatory items are coded and incorporated into a computer-generated credit score. That’s why it’s advisable to get copies of your credit reports before shopping for a loan.

Making sense of your credit isn’t easy. When a credit-card company or a mortgage lender agrees to a paid settlement for less than the balance of what’s owed, that settlement may be reported in many different ways and may be coded differently depending on the creditor and the credit reporting company involved. Such a settlement may be called “paid in full,” “settled in full,” “account legally paid in full,” “paid in full for less than full balance” or one of many other designations. TRW, for example, has nearly 75 different codes to describe a consumer’s account. “Paid account/zero balance” is assigned a code of 13. “Account paid satisfactorily” gets coded as 12. An account that’s 60 days delinquent is coded 78. A 90-day delinquency is coded 80, and so on.

These codes find their way into computer models and credit scores. Some credit scorers assign consumers a score of 0 to 1,000--with 1,000 being best. In other models, 1,000 is the worst possible score.

It’s all a bit maddening.

“Different credit reporting bureaus report different information based on different reports from different credit grantors,” said Marty Dee, a spokesman for the credit division of TRW in Orange. “Identical situations may be treated differently and reported differently; it’s all very individual,” he said. Also, Dee said, the report that consumers see about themselves is not necessarily the same report that lenders see. The lender report is usually more based on codes than on words describing the status of an account.

Lenders, loan brokers and real estate agents in the Valley and Ventura County advise would-be home buyers and those refinancing their homes to get copies of their credit reports in advance of shopping for a home or condo. Reports from the three major credit reporting companies are free to consumers who have been turned down for credit within 60 days prior to requesting the report. Otherwise, the companies charge $8. The reports can be obtained by calling one of the three major reporting bureaus or contacting a loan broker. Lenders will also provide you with a copy of your credit reports, but it’s better to know what’s in them before dealing with your lender.

Once you’ve received a copy of one or more of these credit reports, it should be reviewed carefully. In many cases, the reports contain erroneous information about someone else’s accounts. Other times, a creditor may report a payment 30 days or more late when in fact it was not late at all.

After reviewing the information, the next step is challenging any errors. There are texts available at bookstores and libraries that offer advice about challenging items on a credit report and how to write to correct them. There are also companies that specialize in credit repair--but beware of scam artists. These businesses are not supposed to charge for their services until the work is performed. Also, lawyers and accountants sometimes write letters for their clients to credit reporting companies and threaten action based on the federal Fair Credit Reporting Act.

Last year, Congress came close to approving the Consumer Reporting Reform Act of 1994. This bill would have created new, uniform rules for credit reporting and consumer complaints. However, the bill died.

The Federal Trade Commission, meanwhile, has been trying to require credit reporting companies to be more accountable. Early this year, Equifax agreed to settle a complaint alleging that it failed to protect the accuracy and confidentiality of consumer credit records. The company was accused of failing to delete inaccurate or unverified information promptly and to prevent deleted information from reappearing. The company was also accused of giving credit reports to third parties who had no legitimate reason to obtain them. Now, the FTC wants Equifax to disclose credit scores.

Those interested in obtaining a credit report may want to contact the following credit reporting bureaus: TRW, (800) 392-1122; TransUnion, (601) 933-1200; Equifax Inc., (800) 685-1111.

The Consumer Credit Counseling Service can be reached at (213) 808-4222; Ventura office, (805) 644-1500.