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You also may find information that's way out of date, such as an address, or just plain wrong.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.