January 6th, 2011 18:23 EST
The Big Credit Scam: Your Lender's Dirty Little Secret
Every time I turn around, I`m learning about another credit scam that causes you, the consumer, to pay higher interest rates.
I have studied tens and thousands of credit reports trying to figure out why so many have errors. In fact, about 89 percent of credit reports have at least one error. Brian Diez, a credit expert who lectured at the Credit and Debt Summit, finally cleared up the mystery. Diez revealed a dirty credit scam hiding behind all those errors.
The Dirty Credit Scam
Imagine that you filed a medical malpractice suit against a doctor. When you went to court to argue your case, you learned that the very same doctor sat on the jury responsible for determining the legitimacy of your case.
You would be horrified, right? Our justice system would never allow this to happen.
Yet, this is exactly what happens when you file a dispute about inaccurate information on your credit report. The very same lender responsible for the mistake is the one responsible for verifying whether your complaint is valid.
Making matters worse, the lenders have a selfish interest in reporting inaccurate information to the credit bureaus. By providing the bureaus with negative information about you, the lenders erode your credit score and can charge higher interest rates.
In other words, the system provides little incentive for lenders to keep clean records. The sloppier they are, the more likely they can charge you with higher interest rates.
Let`s take a look at how this credit scam plays out in a situation that occurs every day.
Imagine that Sheila Shopper is first in line at the Whatchamacallit Store. It`s Christmas time, so the line is long, and all the customers are waiting for the one and only cashier, a college kid who works part-time.
The cashier knows he will receive a bonus for each customer who signs up for a retail credit card, so even though the line is long, he asks Sheila is she wants to sign up. She agrees. (By the way, you should never sign up for a retail store credit card, but for the purpose of this story, let`s assume Sheila doesn`t know this.)
Sheila fills out the form and hands it to the cashier, who begins entering her information into the computer.
Of course, the customers piling up in line are becoming increasingly frustrated. What is taking so long? The cashier, feeling pressure, enters all Sheila`s information into the system, but in his rush, he transposes a few of her Social Security numbers. Unbeknownst to anyone, the Social Security number he enters belongs to Madeleine Shopper. Madeleine lives in a different state, and her first name is not Sheila.
Here`s where the credit scam starts: The computer system that analyzes this information does not require an exact match. If the Social Security number matches a last name, the system might consider it good enough, even though the other information is incorrect.
So the bills for Sheila`s Whatchamacallit Store credit card will be sent to Sheila`s house. The payments, or lack thereof, will appear on Madeleine`s credit report.
Do you think this situation sounds far-fetched? It isn`t. According to Diez, 44 percent of reports of identity theft cases are nothing more than merged credit files.
Diez said the technology to correct these mistakes is available, but lenders do not use it.
And the credit scam gets worse when people try to correct information.
Imagine that Madeleine pulls her credit report and learns that Sheila`s Whatchamacallit Store credit card is appearing on her credit report. So she writes a letter to Whatchamacallit Store explaining that the Whatchamacallit Store credit card is not hers.
Unless Madeleine is a politician, an attorney, or a celebrity, her letter will be analyzed by yet another computer system. This system is responsible for determining whether the letter is "frivolous." If the computer system determines that it is frivolous, Madeleine`s complaint will not be investigated.
Does it seem ridiculous that a computer determines whether a person`s complaint is valid? I think so, and so does Diez.
"The lenders are taking the easy way out instead of having an actual person conduct actual research," said Diez. "It is more profitable for the lenders to keep you in the dark than it is to assist you."
If the computer does decide that a complaint has merit, the letter will be outsourced to a foreign country. A $2 an hour worker who speaks English as a second language will then review the dispute letter and assign a two-digit code. This code then determines how the complaint is handled, as well as which computer-generated template letter will be sent to Madeleine.
The whole system is shady, said Diez, adding that lenders benefit from sloppy records. If Madeleine`s credit report is filled with mistakes, her score will likely be lower. If she applies for a Whatchamacallit Store credit card in the future, the lender can charge higher interest rates and collect more fees.
Philip Tirone is the author of 7 Steps to a 720 Credit Score and the creator of the Credit and Debt Summit. Stop this credit scam, and others, by attending the Credit and Debt Summit.