Fair Credit Reporting Act News
Mistakenly reporting closed accounts as open on credit reports can skew credit ratings, distort financial profiles, and confuse lenders and consumers
Tuesday, December 10, 2024 - A consumer's credit history includes closed accounts, which stay on credit reports for up to ten years depending on agreed-upon payment. Errors can arise, though, if these accounts are wrongly stated as open. When applying for new credit or loans, this distortion might result in erroneous debt-to-income ratios, distorted credit use rates, and needless complications. To keep accurate credit reports, credit reporting companies (CRAs) including Equifax, Experian, and TransUnion rely on information sent by creditors. Credit report errors can be corrected given the provisions of the Fair Credit Reporting Act (FCRA). Technical problems during data transfer to CRAs, delays in updating account statuses, or creditor control all help to explain errors in reporting closed accounts. For example, if the creditor does not let the credit bureaus know a paid-off credit card account is closed, it could still seem as active. A common cause of consumer complaints discovered by the Consumer Financial Protection Bureau (CFPB) is found to be errors in account statuses. One in five Americans have mistakes on their credit report, according to Federal Trade Commission (FTC) research; among the most often mentioned problems are misrecorded account statuses. Particularly for users juggling several accounts or asking for new credit, these errors can have broad effects.
Given that 30% of a FICO score comes from credit use, one of the most important effects of reporting closed accounts as open is how that affects credit usage. Credit use is the ratio of credit applied to credit accessible. Should a closed account with a high credit limit be mistakenly shown as active, it could artificially reduce a consumer's usage rate, therefore presenting a false view of their credit behavior. On the other hand, if the account shows an active balance, it could exaggerate the usage rate, therefore reducing the credit score. Debt-to----income (DTI) ratios, a crucial statistic lenders use to evaluate a borrower's debt management capacity, present another problem. If you report a closed account as open with a balance, the DTI ratio will be inflated and the borrower will seem over-leveraged. Even in cases where the customer has paid their debts, this could result in either outright loan denials or higher interest rates. These mistakes can potentially confuse and upset consumers. For instance, a borrower seeking a mortgage may discover their application is denied or delayed as an old account is still represented as active, which calls into doubt their financial stability. Certain consumers can also wrongly think they still owe money on accounts they have already paid off.
Regular credit report monitoring by customers helps them to correct these mistakes. Annually, Equifax, Experian, and TransUnion free credit reports are accessible at AnnualCreditReport.com. Consumers should check for any variances in account balances or statuses and confirm that all closed accounts are accurately recorded when looking over reports. Should a mistake be found, the credit bureau reporting it should be contacted to dispute it. Supporting records--such as final payment receipts or letters of account closure--can help to bolster the argument. Credit bureaus under the Fair Credit Reporting Act (FCRA) must look at conflicts and reply within 30 days. Should the mistake start with the creditor, customers could also have to get in touch with the creditor personally to guarantee proper account status updates.
