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Fair Credit Reporting: 16.6.2.4 Remove Duplicative or Old, Closed Accounts

Have information on duplicate or old, closed accounts removed from the consumer report. Sometimes an account with negative information gets reported twice, especially if there is a collection agency involved.277 A consumer may also want to have extraneous accounts removed if a consumer’s score is being lowered because of too many credit card or revolving accounts. Be careful to ensure that this does not lower the “age of credit history” factor.

Fair Credit Reporting: 16.6.2.5 Do Not Pay Collection Accounts Without Reaching an Agreement with the Furnisher

Do not pay off old collection accounts without reaching an agreement with the creditor or collection agency that addresses the consumer credit reporting issues. Paying off a collection account does not remove it from a credit report. Also, payment may “refresh” the age of the account, showing it as current collection activity.279 According to practitioners, there have been examples in which payment of an older collection account has decreased a credit score by fifty or more points.

Fair Credit Reporting: 16.6.2.6 Pay Off Credit Cards Before the Billing Statement Is Generated

Find out on what day a credit card issuer furnishes information to the consumer reporting agencies. Pay the balance off before that day to create a zero ratio of credit used to credit limit, which will increase the “available credit” factor. If a consumer carries a balance on more than one credit card, move the debt so it is evenly spread over these cards and uses up less than thirty percent of the cards’ credit limits.285

Fair Credit Reporting: 16.7.1 Lack of Flexibility

A fundamental discomfort with credit scoring systems is the idea that a person’s entire “credit persona” is reduced to a number. The rigidity of a credit scoring system and its mechanistic application leave no room for the exercise of human insight and discretion in evaluating applicants.

Fair Credit Reporting: 16.7.2 Credit Scores, Risk-Based Pricing, and Subprime Loans

Credit scores are used to determine, not only whether a consumer will be approved for credit, but at what price the credit will be provided. Essentially, the lower the credit score, the higher the price for credit. The website for FICO even provides interest rates quotes for home mortgages based upon a consumer’s credit score. Note that the FCRA requires creditors to give consumers a notice when they receive a higher-priced loan on the basis of their credit score, which includes a copy of that score.301

Fair Credit Reporting: 16.8.1 Garbage In, Garbage Out: The Effect of Consumer Reporting Inaccuracies on Credit Scores

No matter how valid a model may be, it is no better than the data it is given. If a consumer’s credit history contains inaccuracies, their credit score will be inaccurate. In other words, credit scoring models are developed to assume perfection in credit reporting, which is a fundamentally flawed assumption. Credit history files at the nationwide consumer reporting agencies are notorious for their lack of accuracy.332

Fair Credit Reporting: 16.8.2.1 Generally

Because of the way credit scoring models weigh data from a credit file, certain information that is not negative in the abstract will have an adverse effect on a credit score. This information may or may not be accurate.

Fair Credit Reporting: 16.8.2.2 Credit Limits

One of the most significant problems affecting credit scores had been the failure of certain credit card issuers to report the credit limits on their cardholder’s accounts. Instead, the CRAs would substitute the highest balance on that account as the credit limit for that tradeline.343 Since one of the factors in a scoring model is the ratio of credit used to credit available, this practice would depress a credit score by making it seem that a consumer had “maxed out” on the account.

Fair Credit Reporting: 16.8.2.4 Duplicate Accounts

Sometimes a credit account will show up multiple times in a credit file,361 or derogatory information within an account history might show up multiple times, even though it only occurred once.362 If it is an account in collection, it may be reported by both the collection agency and the creditor, creating a false double negative effect on the creditor score.363 The failure of the CRA

Fair Credit Reporting: 16.8.2.5 Wrong Account Type

Misreporting the type of account may lower a credit score.365 For example, consider if a mortgage account is reported as a revolving account. Suddenly, the consumer seems very over-extended. For example, a common error by furnishers is the designation of mortgage accounts as “installment loans.”366 At first glance, this would not seem like a critical error, but it creates substantial problems for the consumers’ credit scores.

Fair Credit Reporting: 16.8.2.6 Too Many Accounts

Even simply reporting old, closed credit card accounts with no balance may hurt a credit score, if the consumer is considered to have too many of these accounts.368 Because they are not technically negative, these accounts are not subject to the FCRA’s seven-year limit for adverse information, although positive accounts are generally deleted after ten years.369

Fair Credit Reporting: 16.8.4.1 Lack of Validation and Re-Validation

Credit scoring models must be initially validated when they are developed. This means the model must be tested against databases of loan files where the results of the loans (good or bad) are known. The models must also be re-validated periodically. Without re-validation, a credit scoring model can lose its accuracy.

Fair Credit Reporting: 16.8.4.2 Reliability During Recessions

Many credit scoring models were developed in booming economic times and there are questions about how predictive they were during economic recessions.382 Several studies, discussed below, have raised questions with respect to home mortgages. Credit scoring models also may have underestimated the effect of the economic slowdowns on credit card borrowers.383 However, FICO claims that its scores perform well in both good economic times and bad.384

Fair Credit Reporting: 16.8.7 Payment Plans; Loan Modifications; Forbearances

Consumers in financial distress will sometimes negotiate a modification of the terms of their loan with their creditors or will receive a forbearance allowing them to pay late or miss payments. Previously, loan modifications had been reported by the creditors using the Special Comment Code “AC”403 that resulted in a lowering of the consumer’s credit score.404

Fair Credit Reporting: 16.9.1 Credit Scoring’s Disparate Impact

As long as there have been credit scores, there have been concerns that scoring systems contain biases that disproportionately impact minorities and other groups protected by credit discrimination laws.428 Numerous studies have found that minorities as a group have lower credit scores than whites.429 They are also more likely not to have credit scores at all, with about 27–28% of African Americans and Latinos lacking a score, versus 16% of whites and Asian Americans.

Fair Credit Reporting: 16.9.2 Other Credit Scoring Gaps

In addition to disparate impact on racial minorities, research indicates that low-income consumers, renters, and other groups have lower credit scores as a group.436 These gaps between “good” and “bad” scorers might also be self-perpetuating, as low credit scores impede economic advancement, which in turn prevents the consumer from a better financial situation that could improve their credit score.437

Fair Credit Reporting: 16.10 Credit Scores and the Consumer Law Practitioner

A frequent question asked by practitioners is how a particular FCRA or other consumer law violation affects a consumer’s credit score. Credit scores sometimes factor into the measure of damages in a case, especially if lower scores resulted in higher rates for credit or insurance.455 Some have argued that a consumer’s credit score is a property right, and thus harm to a credit score alone is a form of damages.