How to Evaluate a Credit Score
When an individual or a business fills out a loan application, they are always asked to include a credit score. Credit scores can be a strong indicator of an individual or a businesses history of repayment and their diligence in keeping up with their financial records. However, credit scores can also be misleading or based off of poorly kept or inaccurate data. While credit scores can be an important factor in an individual or businesses loan qualifications, more and more studies are revealing how misleading credit scores can be on loan applications.
60 minutes recently did a feature on the harm credit agencies can cause borrowers. In the feature, Steve Kroft, interviews a woman who spent several years trying to get mistakes on her credit report corrected. In the meantime, she was unable to co-sign for her children’s student loans. Inaccurate credit scores, or mistakes that have not been resolved on credit scores are often a determining factor in whether a bank will give an individual a loan.
60 minutes is not the first news report to show inaccuracies in credit agencies. Credit agencies are often inaccurate especially with businesses under $2 million in revenue. The problem is that with companies this small, an insignificant charge, such as paying a cable bill late, can heavily decrease the businesses credit rating. This gives potential investors an inaccurate portrait of the businesses ability to repay a loan. Furthermore, credit agencies often don’t verify reported information and will increase credit scores for a fee.
The three major credit rating agencies, TransUnion, Equifax and Experian have disputed the 60 minutes report, stating the show greatly exaggerates the mistakes made by credit bureaus. Part of the problem surround credit bureaus is their domination of the market. Experian owns FreeCreditReport.com and TransUnion owns TrueCredit.com. These organizations use their own, internal rating system and can increase credit scores for a fee.
Credit reports and scores have a direct bearing on the lending decision process. While a low credit score can indicate a poor investment, it is also important for lenders to look at other financial factors. Peer to peer lending has opened doors for qualified borrowers to get funding, even if they don’t meet traditional bank qualifications. The inaccuracies being revealed within credit agencies, are one of the financial flaws peer to peer lending can draw attention to and help fix.
Watch the full 60 minutes segment at: http://www.cbsnews.com/video/watch/?id=50140748n