July 31, 2011

Credit Reports, Credit Checks, Credit Scores

Evan Hendricks

More and more attorneys are finding the dual issue of credit scores and credit reports coming across their radar screen at unexpected times in unexpected directions.

An attorney in the agrees with his new client that her previous lawyer committed malpractice when he allowed a judgment to be entered against her. The main damage? Her credit was utterly destroyed.

Similarly, a man’s once-pristine credit is ruined when his Social Security number was mistakenly filed as part of a bankruptcy by someone else’s bankruptcy attorney.

A couple in the Southwest, who for years ran a successful dairy farm and ranches, suddenly have to start selling some of their holdings after their bank reported what they claim to be inaccurate, derogatory data about them to major credit bureaus. The allegedly false data meant they could no longer get the credit they had always obtained routinely to continue operations.

A Mid-Atlantic law firm specializing in debt collection has to defend itself against a pro se plaintiff who claims that the firm’s actions forced her into bankruptcy.

These are but a few examples of everyday controversies that turn on the question of credit scores and credit reports.

At the same time, an increasing number of consumers are suing credit card companies or the three major credit reporting agencies (CRAs) for allegedly failing their duties under the Fair Credit Reporting Act (FCRA) to ensure accuracy and investigate disputes over harmful errors. Most of these consumers end up settling for significant sums. The few that proceed to trial nearly always win. Their victories, which usually are owed to a small band of attorneys specializing in FCRA litigation, are resulting in an impressive body of precedent that in turn sets the stage for larger victories.

Accordingly, attorneys might find it worth their while to learn more about credit scores and credit reports and their relation to damages when things go wrong.

What Is a Credit Score?

A credit score is a number that reflects your credit worthiness at a given point in time. The higher the score, the better the risk. The most important score is the FICO score (based on the “Fair Isaac” model) used by some 75 percent of lenders. People with higher scores often can obtain mortgages, credit cards, loans, and insurance at more favorable rates. Conversely, the lower the score, the less favorable the terms will be in any offer that is made. The credit score is based entirely on data in the credit report, which is why, in order to understand credit scoring, one needs to have some understanding of credit reporting as well.

Each Bureau Has Its Own

There are three major credit reporting agencies: Equifax, Experian, and TransUnion. Each licenses the scoring software model from FICO (which had been known as the Fair Isaac Corporation before it shortened the name to its acronym). When you apply for credit, the CRAs apply the FICO scoring model to the data in your credit report file and produce your FICO score, and then sell it to the creditor to whom you applied for credit.

Equifax’s FICO is called the “Beacon” score; TransUnion sells the “FICO Classic” or “Empirica” score; and Experian sells “FICO II” and the “FICO Risk Model” score.

  • Equifax’s Beacon score range is 300 to 850
  • Experian’s FICO II range is 330 to 830
  • TransUnion’s Empirica score range is 150 and 934

Fair Isaac divides the scoring range into five risk categories:

  • 780–850: low risk
  • 740–780: medium-low risk
  • 690–740: medium risk
  • 620–690: medium-high risk
  • 620 and below: high risk or “sub-prime.”

Prior to the 2008 credit crisis, the general rule was that a FICO score of 720 or better was “top-of-the-line,” entitling one to the best rates for mortgages, auto loans, and credit cards. A FICO score from 620 down to the high 500s was considered “sub-prime,” meaning the consumer would have to pay a much higher interest rate. Those numbers have tightened considerably since 2008, with 740 or even 760 being top-of-the-line, and 640 or 650 being sub-prime, depending on the creditor and type of credit.

FICO scores became a staple of the credit system in the mid-1990s after they were endorsed by mortgage underwriters Fannie Mae and Freddie Mac. Their advent and proliferation ignited an explosion and revolution in credit granting. FICO scores enabled computers to “talk to each other,” allowing for lower cost through automation and faster decision making, better segregation of consumers and credit risk, and ultimately greater profitability.

The importance of the FICO score might be best explained by the famous quote from the Vince Lombardi, legendary Green Bay Packers football coach: “If winning isn’t everything, why do they keep score?”

When the system worked as intended, FICO scores created a lot of winners—mortgage and auto lenders, credit card customers, and consumers with positive credit histories.

When the financial crisis hit in 2008, and some people learned the hard way that the “blessing of instant credit” could be a curse, some observers tried to cast blame on the FICO score. The irony was that too many lenders disregarded poor FICO scores that warned of extreme credit risk. In fact, the stated purpose of the FICO score is to forecast how likely you are to become at least 90 days late in making payments in the next 24 months based on patterns in your credit history, compared with patterns of millions of other consumers. Nonetheless, a key failure of many sub-prime mortgage lenders was that they were granting two-year adjustable-rate mortgages to people with lousy scores. It seemed the FICO scores were accurate enough, but these lenders disregarded them—at their own risk.

How They Work

So what is a FICO score based on?

Like the recipe for Coca-Cola, the precise formulas used to calculate various kinds of credit scores are well-guarded trade secrets. Nonetheless, FICO has released enough information to give a very general idea of how scores are calculated.

Remember, the score is calculated by analyzing the “whole” of credit information in the report and the various factors that make up that whole. No singular piece of information or factor by itself determines the credit score. Below are the five factors and each factor’s percentage impact on the FICO score:

  • Payment history (35 percent). How many delinquent payments, how delinquent (i.e., 60 days late versus 120 days late or “charge-off”), and, importantly, how recent?
  • Amount owed (30 percent). Also known as “extent of indebtedness” and “credit utilization ratio,” this is a ratio of how “maxed out” are your credit cards. That is, what are your credit card balances versus your credit card limits? Each credit card is scored separately and then scored a second time collectively.
  • Length of credit history (15 percent). Put simply, the longer the better.
  • Type of credit (10 percent). This is a bit of a mystery category. FICO says it wants to see a “healthy mix” of installment credit (mortgages and loans) and revolving credit (credit cards). Loans from banks are considered positive, while finance company loans are not. Mainstream Visa and MasterCard credit cards are good, whereas a “secured” credit card are not.
  • New credit inquiries (10 percent). Many think applying for new credit produces the biggest hit on your FICO score. Usually not so. Inquiries make up only 10 percent of the score. In fact, all mortgage or auto loan inquiries within a 45-day period are only supposed to count as one inquiry to the FICO model.

Even after knowing these categories, their practical application can be counter-intuitive, making credit scoring reminiscent of Casey Stengel’s instruction to his motley crew of 1962 New York Mets, “All right, everyone, line up alphabetically, according to your height!”

For example, you can have an excellent payment history, with no delinquencies. But if you are “maxed out” on several credit cards, you can have a mediocre or even a poor FICO score.

Some naturally think it is responsible to close credit cards. But from a credit-scoring viewpoint, closing credit cards can lower your score because you’re losing points for available credit limit, thereby hitting you in category 2, and losing points for length of credit history (category 3).

It might be most important to understand “The Importance of Being Recent.” When it comes to late payments and derogatory data-like judgments, collections, and charge-offs, the FICO model wants to know what you’ve done for it—or to it—lately. A delinquency that freshly hits your credit report has the biggest negative impact. Thus, let’s say you have a parking ticket that goes unpaid, doubling with penalties until it finally is reported to the CRAs as a collection. From a strictly credit-scoring perspective, that $120 collection could hurt your FICO score more than the $2,500 unpaid student loan that is now six years old.

Aside from lowering your credit score, certain derogatory data can harm your credit worthiness in another way. If your credit report shows you have outstanding, unpaid debts, such as charge-offs or collections, a mortgage lender or other major creditor will not approve a loan until the unpaid balances are “resolved” and removed from your credit report. In addition, major lenders and underwriters such as Fannie Mae and Freddie Mac will scan the applicant’s credit report for key derogatory terms: “bankruptcy,” “judgment,” “lien,” etc. Thus, outstanding unpaid debts listed on the credit report and other types of highly derogatory data can effectively serve as “deal killers” and figuratively place the consumer in “credit jail.”

Errors and Remedies

Derogatory information can become actionable under the FCRA when it is inaccurate. Inaccuracies are not uncommon.

In fact, one in four credit reports contains errors serious enough to cause consumers to be denied credit, an apartment lease, or a home loan, according to a 2004 survey by U.S. PIRG, the national lobbying office for state Public Interest
Research Groups.

U.S. PIRG’s survey of 200 adults in 30 states who reviewed their credit reports for accuracy found:

  • 79 percent of the credit reports had a mistake.
  • 54 percent had information that was either outdated or belonged to a stranger.
  • 30 percent of the credit reports contained credit accounts that had been closed by the consumer but were still being reported as open.

The FCRA requires Equifax, Experian, and TransUnion to follow “reasonable procedures for maximum possible accuracy.” The law also requires both CRAs and creditors to conduct a reasonable investigation when consumers dispute information they say is inaccurate. Most FCRA litigation proceeds under the latter standard.

A central reason why the number of cases continues to rise and the jury verdicts continue to grow is that both the CRAs and creditors rely on an automated system that lacks the human involvement necessary to resolve more complex or nuanced cases, such as those involving mixed files or identity theft. This results in repeated fruitless disputes and in CRAs and credit card companies engaging in the Orwellian task of “verifying” information that is, in fact, false.

In the wake of increased litigation and higher plaintiffs’ settlements and jury verdicts, the refusal of CRAs and creditors to change their current policies and practices indicates that doing so would not be a trivial effort, and the cost of fending off lawsuits was still more cost-effective than investing in the improvements that critics say are necessary.

This has resulted in a “target-rich” environment for the small community of plaintiff’s attorneys specializing in FCRA litigation, nearly all of whom are members of the National Association of Consumer Advocates. The equivalent of the Physician’s Desk Reference for FCRA plaintiffs’ and defense lawyers is the Fair Credit Reporting manual published by the National Consumers Law Center.

Although a discussion of credit scoring focuses on the mainly economic issue of credit, the main damages awarded in FCRA lawsuits often relate to the distress, frustration, and hardship of being mischaracterized by inaccurate, derogatory credit report data, compounded by the trauma stemming from a CRA’s or creditor’s failure to correct data after they were disputed.

The FCRA allows for “actual damages,” which includes economic damages from credit denials and higher interest rates, as well as non-economic damages of stress, loss of time and opportunity, harm to one’s reputation, and the like. Given the importance of maintaining one’s good name in the world of credit, employment, and insurance, juries have had little difficulty appreciating the harms to plaintiffs caused by unreasonable and chronic inaccuracy.

The FCRA also provides for punitive damages for “willful” violations, defined by the U.S. Supreme Court as when the defendant “knowingly and intentionally committed an act in conscious disregard for the rights of others,” and that “conscious disregard” means “either knowing that policy to be in contravention of the rights possessed by consumers pursuant to the FCRA or in reckless disregard of whether the policy contravened those rights.” See Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007).

The FCRA also provides for attorney fees for prevailing plaintiffs. In cases that “go the distance,” it’s not uncommon for plaintiff’s attorneys to win fee awards ranging between $200,000 and $300,000. Below is a list of recent FCRA court cases and their award judgments:

  • Cortez v. TransUnion, No. 2:05-cv-05684-JF (E.D. Pa. April 26, 2007) (un-published). [Jury verdict: $50,000 in actual damages, $750,000 in punitive damages.]
  • Drew v. Equifax Information Services, No. CV 07-00726-SI (N.D. Cal. Dec. 3, 2010) (unpublished). [$700,000 in punitive damages, $315,000 in emotional distress damages, and $6,326.60 in economic damages, for total of $1,021,326.60.]
  • Johnson v. MBNA America Bank, No. 3:02-cv-523 (E.D. Va. 2003) (unpublished ).  [$90,300 in compensatory damages.]  See also Johnson v. MBNA America Bank, 357 F. 3d 426 (4th Cir. 2004).
  • Jorgensen v. TRW, No. CV 96-286-JE (D. Or. Sept. 11, 1998) (unreported).  [$600,000 in compensatory damages.]
  • Kirkpatrick v. Equifax Information Services, 2005 WL 1231485 (D. Or. May 23, 2005).  [$210,000 in compensatory damages.]
  • Robinson v. Equifax Information Services, No. 1:06-cv-01336 (E.D. Va, Aug 17, 2007) (unpublished).  [Jury verdict: $200,000 in actual damages.]  See also Robinson v. Equifax Information Services, 560 F .3d 235 (4th Cir. 2009) re: attorneys fees.
  • Sloane v. Equifax Information Services, No. CIV 1:05-cv1272 (E.D. Va. August 2006) (unpublished).  [Jury verdict: $351,000 ($106,000 in economic damages and $245,000 in mental anguish, humiliation, and emotional distress damages).]  See also Sloane v. Equifax Information Services, 510 F.3rd 495, 503 (4th Cir. 2007).  [Emotional distress award reduced to $150,000 and new trial nisi remittitur granted at plaintiff's option.]
  • Thomas v. TransUnion, No. CV 96-286-JE (D. Or. 2002); amended by Civ. No. 00-1150-JE (D. Or. Jan. 23, 2003).  [Jury verdict: $300,000 in compensatory damages and $5 million in punitive damages; amended judgment reduced punitive damages to $1 million.]
  • Valentine v. Equifax Information Services, No. 3:05-CV-00801-JO (D. Or. Nov. 9, 2007 (unpublished).  [Jury Verdict: $200,000 in compensatory damages for emotional distress.]  See also 543 F. Supp. 2d 1232 (D. Or. Feb. 22, 2008) re: attorneys fees.
  • Williams v. Equifax Information Services, No. 48-2003-CA9035-O (Fla. Cir. Ct. Nov. 30, 2007) (unpublished).  [Jury verdict: $219,000 in actual damages and $2.7 million in punitive damages.]


Because of all this, more and more attorneys are adding credit scores and credit reports to the list of issues about which they ask clients and prospective clients. 

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