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credit & debt

Why You Should Check Your Credit Reports Each Year

A new study found that one in four consumers identified errors on their reports that could affect their credit scores.

Luckily, I've never found a major error on my credit reports over the years. However, once I did discover that my deceased father was listed as my husband on one of my reports -- a little creepy but not something that would drag down my credit score.

As I said, I've been lucky. That's because a study by the Federal Trade Commission released on February 11 found that one in four consumers had errors on their credit reports that might affect their credit scores and, in turn, lead them to pay more for loans. "These are eye-opening numbers for American consumers,” said Howard Shelanski, director of the FTC’s Bureau of Economics, in a released statement. The results, he said, should make it clear that consumers should check their credit reports regularly. "If they don’t, they are potentially putting their pocketbooks at risk."

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This is the first major study to look at all the participants in the credit reporting and scoring process: consumers, lenders, the credit reporting agencies and the Fair Isaac Corp., which produces the FICO credit scores. And its findings suggest that there is a much higher rate of errors on credit reports than what a 2011 credit-industry funded study found. According to that study, less than 1% of consumers had meaningful errors on their credit reports.

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Of the 1,001 consumers selected to participate in the study, 26% reported that at least one of their three credit reports had at least one potentially material error, which is defined as an alleged inaccuracy in information that is commonly used to generate credit scores. That information includes the number credit inquiries, negative items such as late or missed payments, and delinquent accounts that have been turned over to collection agencies.

Unfortunately, most consumers don't check their credit reports, says John Ulzheimer, president of consumer education for SmartCredit.com. Consumers are entitled under the law to receive a free credit report annually from each of the three major credit bureaus -- Equifax, Experian and TransUnion. However, Ulzheimer says, 96% of free credit reports go unclaimed per year. "I have so many people argue with me that they only need to check their reports when they're applying for something," he says. "That's a terrible idea. That would mean errors will sit on their credit reports possibly for years before anyone does anything about it." That's because the credit bureaus have no obligation under federal law to correct errors until consumers point them out and dispute them.

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The FTC study participants were encouraged to dispute errors that might affect their credit scores. Of those who did, four out of five experienced some modification to their credit report, and slightly more than one in ten saw a change in their credit score after the modification.

To get a free copy of your credit report from the three credit bureaus, visit Annualcreditreport.com. If you find a mistake, you can file a dispute with the credit bureau that has the erroneous information. All three of the bureaus -- Equifax, Experian and TransUnion -- allow consumers to file disputes online.

If you find yourself unable to persuade the credit bureaus that something is legitimately incorrect, Ulzheimer says that consumers should alert the source of the data, which is usually a financial institution or a collection agency. It is the one ultimately responsible for verifying what is and is not accurate from your dispute with the credit bureau, he says. If there is a mistake, the reporting agency is required by law to correct it on all of your credit reports.

Also file a complaint with the Consumer Financial Protection Bureau, which helps consumers resolve issues with the credit bureaus (see Consumer Bureau Now Taking Credit Report Complaints). It won't cost you anything to do this, and the credit bureaus and reporting agencies should take notice if you get the CFPB involved, Ulzheimer says.

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