1: What You Don’t Know Can Hurt You
Getting ready to buy a home for the first time is one of the most stressful things you do in your financial lifetime. If you’re like most people, you probably don’t know much about the process, so you go into it hoping you’re getting some good and reliable guidance from your Realtor and from the mortgage person your Realtor swears “will take good care of you.”
So you go to the bank and sit across the desk from somebody you’ve never met before and fill out a form that asks for your Social Security number, job history, bank account information, and annual income. You do what you are told and wait to see if you qualify for a loan.
The mortgage originator punches a few keys, scans the screen, and then announces you qualify for such-and-such a loan, at this interest rate, and you have a down payment requirement.
You walk out of the office feeling a mixture of excitement and fear. You can see the path to your new home, but you probably have no idea what you’re signing yourself up for ?— ?except for thirty years of payments that are bigger than almost any single check you’ve ever written.
For most, this is a nerve-wracking experience.
And it would be nice to feel that all of the people involved in that transaction are on your side and are working to get you the best deal possible. But the hard truth is that the entire consumer credit business ?— ?from the bureaus that keep track of your credit history, to the credit card companies, auto lenders, and mortgage originators that are in position to give you money, to the credit counseling services that advertise themselves as the solution to your debt problems ?— ?are all lined up with one single goal in mind.
They’re there to make money. Your money.
Those companies are looking to make a profit on everything from the money you borrow to the information you submit just to get the loan process started. And as for that mortgage originator? Regardless of whether or not you actually apply for a loan there or even get approved, they are sending all of your personal data along to an aggregator that then sells it on to other companies that will then advertise their services to you.
In other words, from the very first time you filled out your first application for a student loan or $500-limit credit card, your financial life has been monitored, inspected, and sliced and diced by hundreds of different companies. They’re evaluating you on your performance, predicting your financial future, and figuring out how to sell you more stuff.
But that isn’t all. All the data that those companies are compiling gets crunched into a set of three numbers that make up your credit score. That score is being used by insurance companies, potential employers, landlords ?— ?even potential spouses ?— ?to see where you stand and how you measure up financially.
Most people have no idea who has eyes on their financial life, how things like credit scores are calculated, and specifically what kinds of bad things can happen when they don’t pay their bills on time. It’s sort of like walking into a casino and playing a table game where there are no rules listed and nobody is there to explain what to do. You’re just putting your money down and hoping nobody rips you off too badly.
Even if you’re one of the few people who understands a little bit about how the world of consumer credit works and is aware of what credit scores are and how they work, you’re still probably not getting the real information that lenders and other companies are using to judge you. Most of the free credit reports you receive online or through a special offer from your credit card company are just weak estimates of your true credit scores ?— ?and can be off by as much as 50 points. And 50 points is the difference between qualifying for the best rate you can get on a mortgage or being stuck with a subprime loan that costs you tens of thousands more dollars.
Let’s say you’re one of the very few who knows the full picture of their financial life, and you’re doing a great job keeping track of your credit and protecting yourself and your personal information. In fact, you can have totally perfect data security within your home and your computer, but it just takes one careless merchant that doesn’t invest in robust digital security to accidentally leave an open door for a hacker to take your Social Security number, account number, address, and all the other personal information they need to rip you off.
I’m not trying to frighten you, but there’s plenty that should make you concerned about what’s happening out there without your knowledge. According to the terrific documentary film Maxed Out: Hard Times, Easy Credit, and the Era of Predatory Lenders, 90 percent of all credit reports provided by U.S. credit bureaus have inaccurate information in them. And the fastest growing problem affecting the security of your credit report isn’t a criminal stealing your identity. It’s your file being accidentally merged with somebody else’s and having your credit scores hurt by information that doesn’t have anything to do with you.
You would think that the credit bureaus ?— ?organizations whose goal is to collect comprehensive financial information on as many people as possible so that creditors can predict risk ?— ?would want to have the right and correct information assigned to the right and correct person. But there’s no incentive for them to fix anything, ever. Why? Because in the vast majority of cases, the mistakes on a person’s credit report are causing their credit to be judged more negatively, not more positively. And customers with lower credit scores end up getting charged more interest, which can be more profitable for lenders.
It’s not just me saying it. In 2011, the three main credit bureaus, Experian, TransUnion, and Equifax, settled a class action lawsuit for $45 million brought by almost a million plaintiffs. In the suit, the consumers charged the credit bureaus with failing to accurately report the discharging of debts and for failing to investigate when consumers disputed a record on their reports. In addition to paying the lawsuit settlement, the bureaus were also required to go back and correct the records of more than one million consumers who had filed for bankruptcy going all the way back to 2003.
In another case, an Oregon woman won an $18.6 million lawsuit against Equifax in 2013 after spending years trying to correct mistakes on her credit report that appeared when her file was merged with one for another person. She was denied by a variety of lenders based on the inaccurate information that she had tried to remove on eight separate occasions over three years.
And in 2015, Equifax settled a lawsuit filed by eight consumers who complained that the credit bureau misrepresented the source of public record information that it was placing on its credit reports. If you read your credit report from Equifax and it showed a tax lien, bankruptcy, or other court-related judgment, Equifax reported the source of that material as the specific court where those judgments occurred. But Equifax wasn’t getting that information itself directly from the courts. It was aggregating it from other sources, like a website that publishes links to stories from other media. The lawsuit claimed that E...