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Credit-Score Errors Hit Consumers; Here's How to Lift, Fix Your Score

Why are so many Americans having issues with their credit scores? Here's why -- and what to do if you need to build up your credit score.

Americans seem to have a love-hate relationship with their credit scores. They love it when the system hums on all cylinders and hate it when credit-scoring models ding them unfairly.

Why? Because a lower credit score leads to higher interest rates on approved credit and outright rejections from creditors on major household financial initiatives like mortgages, auto loans, and credit cards.

A case in point:

Equifax,  (EFX)  one of the three major credit scoring agencies (beside Experian  (EXPGY)  and Transunion  (TRU) ), said it misreported consumers' credit scores between March 17 and April 6, 2022.

The snafu hurt the credit scores of millions of Americans, reportedly leading to negative responses for mortgages, auto loans, credit cards, and other credit applications. 

Over 300,000 Equifax accounts were affected by the credit-reporting errors, with some credit scores falling by 25 points or more.

“In April, we identified an issue within a legacy, on-premise server environment in the U.S. slated to be migrated to the new Equifax Cloud infrastructure,” said Mark W. Begor, chief executive at the Atlanta company. ‘This issue, which was in place over a period of a few weeks, impacted how some credit scores were calculated.”

The scoring issue was fixed in April, and Begor said Equifax had spent the past three months working with its customers to determine how the issue may have affected consumers. “We will also be engaging a third party for independent review,” Begor said.

Errors Hurting Consumers

The damage done by erroneous credit score models may be worse than credit consumers think.

A recent report from LendingTree found that 42% of Americans were denied a credit product due to their credit score in the past year, with credit-scoring errors like the Equifax flub playing an “impactful” role.

These data are from the study:

· 42% of Americans say their credit scores prevented them from obtaining a financial product in the past year. That figure rises to 74% among those with poor credit. Credit cards (25%) and personal loans (12%) are the top products consumers say they were denied due to their credit.

· 40% of Americans don’t think their credit scores accurately reflect their financial responsibility. This is especially true for those with poor credit (60%), millennials (47%), and women (44%).

· Payment history is the most important factor in calculating a credit score, but 50% of Americans don’t know that. GenZers (61%) and Millennials (60%) are the most likely to incorrectly answer this question. But only 39% of Gen Zers say payment history should be the most important factor, the lowest among the generations.

· 44% of Gen Zers don’t know their credit scores, while 25% say they don’t know how to find out. Overall, 19% of Americans say they don’t know their credit scores — and 12% don’t know how to check their credit scores.

Why Credit Scores Are So Chaotic

The primary and most obvious reason credit scores – and credit scoring – are so out of balance is the onset of covid-19.

“Many people lost their job, had their wages cut, or became underemployed out of desperation to find work,” said Brian Greenberg, CEO at Insurist, in Scottsdale, Ariz. “Because their income was adversely impacted, many families were unable to make timely payments on outstanding debt or pay new medical bills, which adversely affected their credit.”

Inflation has also pared credit scores in America.

“With a larger percentage of their monthly budget going towards food and fuel, people have found it increasingly difficult to keep up with personal and student loan payments, to the detriment of their credit,” Greenberg told TheStreet.com.

Additionally, while many individuals’ credit scores have legitimately dropped, there is an accuracy problem.

“According to a Consumer Reports investigation, 34% of consumers found an error on their credit report in 2021,” Greenberg noted. “This negatively impacts the ability of these people to obtain credit cards, be approved for personal loans, and it can even negatively impact their employment opportunities.”

Many lenders also tightened up in lending in early 2020 but began to extend more credit into later 2020 and for most of 2021.

“The additional credit was offered during a period of record high average credit scores and decreasing unemployment,” said Chad Prashad, president and CEO of World Acceptance Corp., in Greer, S.C. “However, inflation has impacted everyday spending and there is increasing concern that when there is less left over at the end of the month to pay bills, consumers may miss payments.”

Lenders today are also declining applicants they would have approved last year.

“This is especially true for those with less than perfect credit,” Prashad told TheStreet. “Forty-five million Americans have subprime credit scores (i.e., scores below 620). Due to the increased risk of default when lending to consumers with poor or new credit, traditional banks and lending institutions will not offer them loans.”

Action Steps to Fix and Improve Credit

What steps can people take to improve their credit scores and boost their chances of getting a good loan or a credit card?

If you suspect a problem, or you’re just motivated to build a more robust credit score, try these tips.

Watch your credit score like a hawk. With the Equifax fiasco in mind, the best way to fix any mistakes in your credit report is to keep a close eye on your own credit report.

“Regularly checking your credit score also helps identify mistakes which could lower your credit score,” said Bill Ryze, a chartered financial consultant at Fiona, a financial services platform. “So, occasionally request for your credit report, and check for errors. If there are any, contact the bureau or listed credit company to make corrections.”

Build your credit. People with no or poor credit need to build a track record as a safe credit risk. “They can do that by using credit-builder loans or secured credit cards,” Greenberg said. “They can also be added as an authorized user on someone else’s credit card.”

Don’t miss payments. Missing payments hurts your credit score, while having a history of making on-time payments can help you achieve an excellent score. “Payments 30 days late can be reported to credit bureaus and damage your credit scores,” Greenberg noted.

To prevent missed payments, set up automatic payments for the minimum amounts due (you can always pay more) and contact your credit issuers if you’re having trouble making payments because of financial hardship.

Limit how often you apply for credit. Each credit application you submit can lead to a hard inquiry, which can hurt your credit score. “Opening new accounts also decreases your average account age, negatively impacting your score,” Greenberg added.