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Credit reports still a mystery, GAO finds

While consumers are very aware of credit reports and scores, many don't understand factors that negatively impact their financial report cards, according to a report issued by Congress Wednesday.
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While consumers are very aware of credit reports and scores, many don't understand factors that negatively impact their financial report cards, according to a report issued by Congress Wednesday.

Most consumers don't know their scores can be used for insurance or employment decisions, the report also says, and a scant 6 percent of consumers know the Federal Trade Commission is the agency to turn to if they have a run-in with the credit reporting agencies.

The report also found that Hispanics understand their credit rights far less than whites or blacks.

The report, "Credit Reporting Literacy: Consumers Understood the Basics but Could Benefit from Targeted Educational Efforts," was issued late Wednesday by the General Accounting Office. It was mandated by the 2003 FACT Act, best known to consumers as the law which gave them a free copy of their credit report every year. Consumers were surveyed last year, before free credit reports took effect.

"At some level we were pleasantly surpassed that people had a general notion about credit reports," said Richard Hillman, one of the study's authors.  "But their awareness levels quickly dropped off," when asked more specific questions about their credit reports, he said, such as how long negative information remains on a credit report, or how the dispute process works.  Only half knew that using all their available credit -- being close to the credit limit on several credit cards -- lowered their credit score.  And nearly three-quarters didn't know that credit reporting agencies must investigate disputed items for free.

Most don't know credit scores used by other industries
Consumers were well-versed in the idea that credit scores and reports might impact the interest rate they pay on a home mortgage. But less than half know low scores can adversely impact their auto insurance rates, and only 33 percent know credit histories can play a factor in employment decisions.

Those results didn't surprise Liz Pulliam Weston, author of "Your Credit Score" and an MSN Money columnist.  She says many consumers have yet to realize that credit scores are used for much more than financing decisions.

"Every time I write about it I get a ton of e-mail from people saying they are outraged," she said. "We need to drive home the point. The importance of credit scores should be taught in high school, so people know the financial decisions you make might mean you will not get that job or that apartment."

The GAO study revealed a wide disparity of knowledge surrounding credit issues related to education level and experience in the credit industry.  Those without a high school education, or who had never borrowed money to purchase a car or home, were much less likely to be aware of credit reporting intricacies and rights.

Hispanics under-served by industry
The survey also revealed Hispanics were less familiar with credit reports and credit scores than whites or blacks.

While 78 percent of whites could define "credit score," only 39 percent of Hispanics could. Fewer than half of Hispanics knew they could see their credit report. About 60 percent of whites and blacks said they had obtained their credit report, but only 40 percent of Hispanics had. And while about 90 percent of whites and Blacks knew late payments could affect their credit score, only 70 percent of Hispanics knew that. Hispanics were also, as a group, half as likely to dispute erroneous items on reports, half as likely to hold a car loan, and one-third as likely to have a home loan.

"I think it just shows how much more we need to do to get Hispanics in the mainstream," Weston said.  Cultural issues sometimes impact Hispanic participation in the credit system, she said, because many immigrants come from countries where the banking system can't be trusted.  "It is an underserved population.  Lenders are making some steps that way because they realize there is money to be made. ... it is important to make sure everybody understands how the credit system works."

Hillman said the report urges government agencies to do a better job marketing credit information to Hispanics and other under-served populations.

"The federal government ought to be targeting its efforts to specific groups that need the information the most," he said.

Consumers don't know FTC's role
The other striking result from the study -- 94 percent of people did not know the Federal Trade Commission was the place to go with complaints about credit reporting agencies. The report suggests the agency needs to do more outreach so consumers are aware of its regulatory position.

"It doesn't surprise me," Weston said.  "Consumers don't know which way to turn or how to go about process of disputing items on their credit report. I would love to see the FTC to do more advertising of its role."

The FTC responded to the report by saying it is already engaged in a number of publicity efforts, including publication of educational materials and public service announcements.  Earlier this week, FTC chairman Deborah Platt Majoras said the FTC received between 15,000 and 20,000 consumer questions each week related to identity theft and privacy.

Privacy expert Rob Douglas, who operates, was sympathetic with the workload facing the agency.

"Over the last decade, issues like identity theft and electronic fraud have just exploded, and it's not clear to me that Congress or any administration has kept pace funding-wise, providing staffing to that agency," he said.  "I think they have a legitimate argument that they do not have the resources."

Bob Sullivan is author of  Your Evil Twin:  Behind the Identity Theft Epidemic