A 2004 study showed that 4 out of 5 credit reports contained at least one error.
The errors were of various types with different implications. A quarter of the errors, for example, were of the “serious” nature; errors that could lead to a credit denial because of a false-reporting delinquency or collection.
A much larger source of credit scoring errors, though, was related to misreported personal data.
More than half of the mistakes on credit reports were found to be related to erroneous name spellings, incorrect social security numbers, and/or wrong addresses.
These types of demographical errors can damage credit scores in not-so-obvious ways:
- The strong credit report of a “Jr.” may mix with the weak credit report of a “Sr.”, or vice versa
- Credit accounts demonstrating strong payment histories may be omitted
- Derogatory credit of like-named people can “merge”
To limit demographical errors, a person should apply for new credit using a consistent form of their name, and then use that form on every new application.
John A. Smith, Jr., for example, should always apply for credit using the name “John A. Smith, Jr.”.
Short-cutting an application with “John Smith” can lead to a “mixed” credit report that combines the tradelines of multiple John Smiths. Especially because there is a John Smith, Sr., who likely lived at the same address at one time, and who may have a similar social security number.
Credit agencies do not discern between two similar sets of demographic data very well.
In the four years since the original study, it’s not likely that the 80% error rate has improved, but by limiting demographical errors in our own histories, we can reduce the frequency and severity of the problem.