Credit Where It's Due

Your credit rating may be worse than you deserve.

In 1996, after a seven-year absence, I attempted to rent a house in Tucson. To my astonishment, I was turned down because of a "bad credit report." In my outrage, I went to a local credit bureau's office and found out what was wrong. According to the report, I had not paid a fee charged by the University Medical Center. I called the UMC's accounting department and discovered that, because I had disputed a charge and had been resentfully late in paying it, the credit report mistakenly listed the charge as unpaid. UMC agreed to straighten out the matter with the credit reporting agency and my new report finally indicated I was a solid citizen.

But that's not all. Since virtually everyone in the financial community urges us to make periodic inspections of our credit reports, I did so recently and discovered two errors: My own birthday was mis-listed, and my wife's age was alleged to be 91, 40 years off the mark.

Credit reporting errors are legion, according to Consumer Reports magazine, which used its own staff members to test accuracy. "[W]e received and evaluated 63 credit reports--and found inaccuracies in more than half with the potential to derail a loan or deflect an offer for the lowest-interest credit card," according to an article in the July, 2000 issue.

In Tucson, the rate may be smaller. "I've read somewhere that errors on credit reports are so rampant that it's like 15 to 20 percent of information reported to credit bureaus is in error," said Robert Oropeza, senior loan officer at Home Loan Executives. Oropeza is a mortgage broker whose judgment depends on accurate credit reporting. "To get [an error] removed," he added, "whoa, baby--you have to send out letters of contest to all three major credit bureaus, explaining who you are and proving that it was a mistake. It takes four to six weeks."

Consumer Reports found several ways in which credit bureaus screw up: mistaken identities, misapplied charges (a stranger's debt attributed to the wrong person), uncorrected errors (in which the consumer asked for a correction that is neglected) and misleading information.

"We found inaccuracies in current addresses and employers, birth dates and lists of former addresses in 26 reports," said the magazine. "One staffer, who has lived in the same home for 13 years, had six different addresses on his report. This was easily explained: The rural route number had been changed once, then converted to a regular street name. But a lender who didn't bother to ask might assume that this individual was a transient, potentially making him ineligible for favorable credit terms."

Errors in a credit report can be disastrous. In my own case, once I had straightened out the erroneous information about my UMC payment, I went back to the rental agent and asked that she take another look at my credit history. She refused. No amount of pleading budged her.

A bad credit report can sink an application for a house-mortgage loan or an auto loan. At best, it can mean a loan with higher interest. Oropeza says his company rejects 30 to 40 percent of loan applicants because of a bad credit history.

Routinely, he orders a credit report and a FICO score on every applicant. The acronym stands for Fair, Isaac and Co., described by Michael Liedtke, an Associated Press writer, as "a secretive technology company located in a nondescript office park in San Rafael, Calif., 20 miles north of San Francisco." On September 30 Liedtke wrote, "When it comes to getting a mortgage, credit card or insurance policy, consumers are coming to understand that the most important number affecting their application is their FICO score ... . For decades, these scores have been kept hidden from the public by lenders."

Whether or not the score is secret, it is based on several factors: timeliness in paying bills, bankruptcy, current outstanding debt compared to credit limits, the length of credit history, the number and types of credit accounts. It does not consider race, religion, medical history, gender or marital status.

"They take into consideration your debt, like how much credit you have," says Oropeza. "Say you have $10,000, $20,000 or $30,000 of unsecured credit (like credit card debt). If you have a lot of debt, that will go against you. The best borrowers are the ones with very little debt. If you've got your balances at about a third of your available credit, that's acceptable. Say you have a $10,000 credit line on your VISA card and you owe only two or three thousand, a third or less of your available credit, that's good. If you have no debt at all, that's better yet."

The best FICO score, says Oropeza, is 700 or better. It is "like an A-plus and you will get a good loan at the lowest interest rate. Anyone who has a FICO score in the high sixes is still considered A. But when you start getting into the low 600s, like say 605 or 610, then it becomes more difficult to be approved for credit. And if you have a 500 FICO score, forget it. You're not going to get a good loan; you probably have to go to a non-conforming lender and pay a higher interest rate to get a loan approval."

To stay out of debt, is it a good idea to pay cash for everything? No, says Oropeza. "You've got to develop a credit rating. Actually, if you pay off an account ahead of time that makes you look even stronger in the eyes of a bank. If you are a consumer who pays cash for everything, you need to try to open up a credit card. Most banks will let you put a thousand dollars in the bank and give you a secured credit card where you can charge, like a VISA with a $1,000 credit line. If your bank doesn't offer it, there are companies that do. For example, Providian [] offers a secured card where you mail in like $500 and open up a savings account--and they pay really good interest. You've got to start somewhere. That will help you develop a FICO score. If you want to buy a house someday, you need two or three trade lines [credit cards] through a major bank."

But don't go hog-wild. "You have to use credit sparingly," says Oropeza. "The best credit card is the one you pay off every month, leaving a zero balance. Paying cash for everything is not the way the world goes around. If you want to buy a car or a house with a low-interest-rate loan, you need to have at least two or three established trade lines." But no more. "Nobody needs 20 credit cards." In fact, according to Consumer Reports, the more credit cards you have (14 is the average among consumers), the more chances there are for credit-reporting errors.