You apply for a loan but are rejected because of information in your credit report. You're upset and puzzled, because you've always paid everything on time. What could be in the report?
The answer is that mistakes can creep into your file, are difficult to remove and can make your life miserable, say consumer groups and regulators. Reforms are on the way but you still should take the initiative.
"Is your credit file doing something for you or to you?" asks Paul Richard, education director at the National Center for Financial Education.
You should routinely check your file, especially before applying for a loan, Richard and other consumer advocates say. You're the person best equipped to spot errors in your own report. And it's far better to find them before you apply for credit.
Be sure to get a copy of your file from each of the major credit-reporting companies -- TRW Information Systems, Equifax Inc. and Trans Union Corp.
Richard says you should check all parts of each report for accuracy and completeness. You could find information about other consumers, especially those with similar names, mingled with yours.
You also may find information that's way out of date, such as an address, or just plain wrong. And you may find accounts listed that you don't have.
All the companies include explanatory material, but the reports can be hard to understand. TRW has the most codes and abbreviations -- more than 150.
Errors in credit reports produce more consumer complaints than any other problem or practice in the industry, according to Jean Noonan, associate director for credit at the Federal Trade Commission's Bureau of Consumer Protection.
That's also true in Maryland, says George W. Jones, assistant commissioner of the state's Office of Consumer Credit.
Jones says credit reporting companies "put in the file whatever the retailers provide to them. Nobody does any checking. And you don't know about it until you're turned down for credit." Another issue is the use of scoring systems that allow a business subscriber to get a quick assessment of a person's credit worthiness. Consumer groups say individuals are entitled to know how they are being graded.
Grading systems are common in the industry; all three credit reporting companies offer their subscribers various scoring services for an extra fee.
Only Equifax offers consumers a similar service, called Your Financial Update, for $34.95 a year, that analyzes the information as a bank would and gives the person a grade. The service also offers suggestions on how to improve the grade.
Five bills have been introduced in Congress that would address consumer concerns by greatly strengthening the Fair Credit Reporting Act, which governs the industry. A House subcommittee is expected to report out draft legislation soon.
A full committee hearing is expected in the fall, but a consolidated bill probably will not go before the whole Congress until the next session.
The legislation has become a rallying point for many consumer organizations. Meanwhile, the three major companies are trying to defuse the controversy. They dominate a national computerized system containing 450 million credit files.
Industry spokesmen say the credit reporting network works well; some errors do occur but are inevitable in a system that processes billions of pieces of information per month.
The debate is being played out in Congress, where proposed legislation would entitle consumers to free annual credit reports and would give people more control over who sees their credit reports.
Moreover, the legislation would curtail the industry's marketing activities and would penalize banks, retailers and other credit grantors for sending erroneous information to the credit reporting companies.
Several bills would continue to allow prescreening but only if consumers are notified ahead of time and given a chance to "opt out." The industry says consumers already can keep their names off these mailing lists. It plans to launch an advertising campaign soon to inform people of the option.
The debate also has reached the courts. Texas, joined by four other states, filed suit earlier this month against TRW, challenging the company's compliance with the Fair Credit Reporting Act.
The suit says TRW violates consumer privacy, uses secret scoring systems and makes reporting errors that have harmed people's credit ratings. Five more states have petitioned to join the Texas suit, and are asking that it be moved to federal court. New York has filed a similar suit charging that TRW violates state law.
The company has filed counter suits in New York and Texas, defending its activities and claiming that states don't have jurisdiction over the federally regulated industry.
"TRW is the industry leader in both consumer assistance and privacy protection, and the attorneys general have ignored that fact in pursuing their cases," D. Van Skilling, executive vice president, has said.
The major companies are taking steps to enhance the industry's image, upgrade computer systems and improve consumer service.
TRW says it will begin phasing in toll-free consumer lines in October and plans to increase spending on consumer assistance by 25 percent this year.
Equifax is committed to setting up a toll-free, 24-hour consumer service center in December with trained personnel available from 8 a.m. to 11 p.m. to handle questions and complaints.
The company also promises to resolve disputes and errors in less than 30 working days.
In addition, Equifax says it will redesign its credit reports so consumers can understand them more easily. And the company plans to install new software to make sure the right information gets into the right credit file.
While applauding the moves by TRW and Equifax, consumer advocates say that tough new legislation still is needed.
"There are a number of areas that [the industry's plans] don't address," says Michelle Meier, government-affairs counsel for Consumers Union. She cites the need for free annual credit reports for all consumers -- a step the companies say is too expensive.
In most states, a consumer pays $15 for each copy of a credit report. If a person has been denied credit, the report is free. Several states cap the price for each copy; in Maryland it's $5.
Meier also says that regulatory laws should incorporate the legal principle that access to a person's credit file must be approved in advance by that person.
Critics of the industry point to the following evidence that mistakes in credit files are not rare:
Of 9 million consumers who looked at their credit reports, 3 million -- or 33 percent -- found errors or outdated information, according to a 1989 study by the industry itself. But the industry compares the 3 million to the 450 million existing files to come up with an error rate of under 1 percent.
In another 1989 study, a total of 1,500 files from the three major companies were examined and serious errors found in 43 percent of the reports. The study was done by Consolidated Information Services, a company that cross checks the credit reports of applicants seeking large loans, primarily mortgages.
The industry says it intends to get a grip on the scope of the error problem through a survey to be conducted by the Big Six accounting firm of Arthur Andersen. Results are expected in the fall.
What bothers consumers the most is that the burden of correcting mistakes seems to fall on them. It requires endless phone calls and letters and can be costly.
Moreover, having proof of a mistake does not guarantee that the credit reporting company will remove it from your record. The company probably will refer you back to the creditor who originally gave you the black mark.
Even if you persuade the creditor to submit a correction, it may never find its way into your file, according to testimony at Congressional hearings.
Or the correction may take effect at just one of the credit reporting companies. Or the bad data may resurface later from some computer limbo and reappear in your file.
"When it comes to straightening out erroneous credit reports, some consumers have found credit bureaus can be more difficult to deal with than the IRS," says Elgie Holstein, director of Bank Card Holders of America, a consumer group.
Where to write
To check your credit file, write to each of the big three companies and order a report. Couples must make separate requests and pay for each spouse. Every request must have a signature.
* Equifax: SEnd $5 check or money order along with full name, current and past address, Social Security number and date of birth to Equifax, P.O. Box 4349, Silver Spring, Md. 20914.
* Trans Union: Send $5 money order (no checks) along with full name, address, two credit-card account numbers and Social Security number to Trans Union, P.O. Box 360, Philadelphia, Pa. 19105.
* TRW: Send $5 check or money order with full name, address, Social Security number, year of birth and spouse's first name to TWR, P.O. Box 779, Columbia, Md. 21045.