In search of the honest credit repair shop

FTC made the headlines recently complaining about inaccurate consumer credit reports. The Wall Street Journal (link) has a typical report on this research. Here's their summary:

In the FTC study, 262 of the 1,001 people who reviewed their credit reports spotted at least one potential "material" mistake, such as a credit-card account that wasn't theirs or a late payment that they didn't believe was late.

That sounds like a worrisome 25% error rate.

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In Chapter 2 of Numbers Rule Your World, I explain why focusing on reporting inaccuracies is counterproductive, particularly and ironically for those who have good credit. The reporters clearly haven't read the 370-page report the FTC has put on line.

If they did, they may have noticed the chart shown on the right (in the main document). The chart shows the proportion of consumers in their sample who have all the disputes denied (green), who have all the disputes denied (blue), and those who have some of their disputes accepted (yellow).

One feature of this chart that can easily get lost is the uniformly short columns corresponding to those with high credit scores and the much taller columns for those who bad credit scores.

Those with low scores are much more likely to find mistakes in their reports than those with higher scores.

If the reporters flipped to Appendix D, they would have seen the following table:

Forty-five percent of those with credit scores below 590 claimed at least one potential mistake while only five percent of those with 790 or higher credit scores did.

What kinds of mistakes are being reported? Refer back to the WSJ quote above. A late payment that may not have happened will be disputed - what about a late payment that the credit bureau didn't know about? Would the consumer volunteer that information? Similarly, if the account not belonging to the consumer has great credit, thus pulling up one's credit score, would the consumer ask the bureau to take it out?

If the FTC encourages consumers to dispute credit reports, the end result is that the credit scores become less accurate, not more accurate. The dispute process introduces a bias so that the reports tend to contain mistakes that cause overestimation but not those that cause underestimation.

Worse still, this policy penalizes the good people, as it allows less creditworthy consumers to unfairly inflate their scores. In general, it hurts the predictive power of credit-scoring algorithms.

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It's ok for the credit reports to have errors so long as they are unpredictable. This means that positive errors are as likely as negative errors.The following table is overwhelming proof that the credit dispute process introduces bias:

Pretty much all disputes are resolved to the favor of the consumer. I don't think the credit reports only contain errors that penalizes (low-scoring) consumers.

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Final question: we know there are credit repair agencies who can help you correct your credit scores. Have you seen any of these agencies advertise as the honest agency who will help lower your credit score to make it more accurate?