Every system has its flaws.
Sometimes you have to dig to find them, and sometimes they slap you in the face. Every day more and more consumers take serious, costly hits because of flaws within the credit reporting and scoring system. I’m convinced the flaws will keep increasing until consumers reach a boiling point. Once they’ve had enough, they’ll be forced to take action-to get involved.
Consider that the key to successfully managing credit aimed at getting and keeping The Big Score rests not in doing the right thing from an ethical standpoint, but in doing the right thing from a legally strategic standpoint. The only way to accomplish that goal is to recognize that sometimes the appropriate action is one that seems counterintuitive. That’s where understanding flaws in the credit scoring system pays off. And in my opinion as a credit score expert who has worked on thousands of consumer credit challenges, following are the top 5 Flaws in our Credit Reporting and Scoring System:
Guilty Until Proven Innocent
Yes, it runs counter to the essence of the U.S. Constitution; but in the eyes of industry professionals who implement the credit scoring system you are guilty until proven innocent-the burden of proof falls on you, the consumer. If you fail to convince these professionals that you are not at fault, you will be held accountable. And sometimes, even if you prove your case, getting the creditors and credit bureaus to alter their records is virtually impossible without filing a lawsuit.
This system doesn’t favor the consumer. Case in point, consumers must produce actual documents to have inaccuracies removed from their credit files, while those furnishing the credit information only have to send a tape-to-disc transfer. This is unreasonable. When creditors first supply a derogatory report about you to the credit bureaus, they are not required to provide documents, proof of signature, or proof of actual ownership of their claim. Yet it is only after the damage has been done that consumers can challenge the accuracy of accounts.
One simple error on their part, a number transposition, clicking on the wrong box and BAM! Your score can plummet 100 points. Unless you can afford to hire a savvy attorney, it takes months, sometimes years, to prove your case. Face it, if you pit most consumer bank accounts against the credit bureaus, there is no doubt who will prevail.
It’s not right. People with their credit challenges should be innocent until proven guilty, just as they are in our legal system.
The Punishment Doesn’t Fit The Crime
Most consumers believe that being a little late in paying a bill is merely a symbol of our hectic lifestyle. Surely the creditors and the credit bureaus understand, right? Wrong! Just a single 30-day late pay can lower your score by 80 points. That reality exposes an enormous flaw. After all, a collection or repossession causes you to lose approximately 100 points, but the gravity of these is far more severe than a 30-day late. The difference behind the derogatory is huge. So you should not be penalized as much. There should be caps on credit score penalties which consider the type of derogatory, the amount of derogatory, and the number of derogatories.
Universal Default Should Be A Crime
The Consumer Federation of America estimates that low credit scores-which, as outlined in my book, The Big Score – Getting It & Keeping It, are largely the result of credit reporting errors made by the credit bureaus-cost consumers an extra $28 billion a year in additional interest rates and fees on credit cards due to a phenomenon called Universal Default. (2) This number is up $8 billion since 2007.
When it comes to your credit, you have to make certain that you manage every aspect of it perfectly, and at all times. Believe it or not, a drop in your credit scores can cause ALL of your credit card interest rates to skyrocket.
Essentially, universal defaults will spread like a nasty virus throughout every aspect of your credit, causing you to instantly be charged punitive rates for every credit account you have. Outstanding credit card debt in this country is more than $968 billion dollars. An instant and punitive rate increase can prove devastating to consumers who suffer across-the-board increases in their monthly obligations.
Creditors & Credit Bureaus Overrule Our Court System
No doubt about it, few experiences in life are as trying as a divorce. Certainly, every spouse feels total relief when he or she has been awarded a judgment that says you are free from your ex’s credit card debt or car loan. Not so fast, though.
Bottom line is that a divorce decree does NOT take precedence over a creditor agreement. In other words, the credit bureaus and creditors actually trump a divorce settlement, making you liable for your spouse’s debt regardless of what the judge says.
I’ve have had this conversation a thousand times. It’s just too hard to believe, and many of my clients refuse to accept it. However, at least until legislation is amended to address the issue, this one is set in stone. I talk about in great detail in my book, The Big Score.
We’ve all heard of Double Jeopardy, a procedural defense and constitutional right that prohibits a defendant from being tried twice for the same crime on the same set of facts. Well, in the credit scoring system, one derogatory account can be reported up to three times-Triple Jeopardy. If the original creditor sells the debt to a collection agency, both the original creditor and the collection agency can report the account. Then, if the original creditor or collection agency files a judgment, the public record is also reported. And all these records show the past due debt and all deal serious derogatory penalties to credit scores. The really bad news here? There’s NO legislation or regulation whatsoever in the current ACTS to protect you. One way or the other the creditors, collection agencies, courts and credit bureaus are able to do WHATEVER they want-while unwitting consumers are left to deal with Triple Jeopardy.
The massive creditors and credit bureaus carry enormous influence. Reform is bitterly fought as highly paid credit industry lobbyists maintain their reign over an industry. That explains why the system is so flawed. Industry leaders make enormous sums of money by keeping people in the dark. They know the system is broken, and they refuse to fix it. Why? It comes down to dollars and cents. Meanwhile, consumers endure the nonsense.
For more information, feel free to reach out! Seriously. I love helping people as they explore the intricacies of the credit report. Conact me for any questions, check out my book or set aside time for a serious credit score assessment!
Daniel Friedman says
We are in the process of developing some property for over
5 million dollars. Naturally, we are going to go to several banks
trying to get the best loan. Apparently the credit agencies lower
your ranking based on the number of times you have gone for
a loan where the banks need to see your credit. I understand for
the most part why this is used, but it seems absurd to the nth degree
that we would have our credit numbers lowered for this. It actually
states the reason on the report. Is there anything I can do to rectify
Yes, it’s called a Hard Inquiry. The process of applying for new credit makes up 10% of your credit scores. That’s 85 points. Logic behind it is that from a creditor’s point of view, consumers who have excessively shopped for credit in the past 6-12 months may be trying to spend beyond their means, making them a higher credit risk than consumers who have not. Statistical studies also show that multiple inquiries can often be associated with a high risk of default, since distressed borrowers desperate for assistance are known to contact many lenders in hopes of finding someone who will approve them whether they can afford the new credit line or not. Although this logic obviously doesn’t apply to everyone, we all unfortunatley have to live under the same rules.
The good is that not too long ago, Fair Isaac & Co. (FICO) determined that a consumer shouldn’t be punished for something as logical as shopping around for the best interest rates before buying a car or home, so they came up with something called De-Duplication. This means that you can have your credit pulled by as many mortgage or auto lenders as you want within a 45-day period and it will only be counted as one hard inquiry against your credit scores. And if your credit scores are strong, you will gain back the points lost in a very short period of time.
So try to do your loan shopping withing that 45-day period and you should be fine.
I hope this information was helpful.
Jose H. Caraballo says
Ugly truths are always painful aren’t they?
As tough as all of this sounds there are many ways to fix many of these problems using a professional that knows the ins and outs of this process. Do you think that any of the recent changes to the credit laws have made any of this easier? Thanks a bunch for the info.