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21% of Credit Reports Have an Error. What About Yours?

Written by Gary North on February 19, 2013

A recent report indicates that 21% of all Americans have an error in their credit scores. It also reported that 5% of Americans have serious errors in their reports.

Ho, hum. What else is new?

If this report were not the case, I would not believe any of the statistics regarding the credit reports. Anybody who takes such a statistic seriously is a statistical novice.

Why do I say this? Because this news report on credit reports is conformable with what is known as Pareto’s law. Pareto’s law is the famous 20/80 distribution. In any large system, 20% of the factors contribute to 80% of the success of the organization. Simultaneously, a different 20% of the factors contribute to 80% of the failures of the organization.

Of course 21% of the credit reports have an error. Of course 5% are seriously erroneous. What is 20% of 20%? Four percent. That is very close to 5%.

We are told that 5% of the errors in the credit reports are serious. Of course they are. If they were not, you would figure that the credit reports are seriously inaccurate. You would have to conclude that somebody is deliberately tampering with the figures.

I hereby announce something else.  Approximately 1% of the credit reports have catastrophic implications for the people involved. Why do I know this? Because 20% of 20% of 20% is .8%. That is close enough to 1% to cover my estimate of 1%.

It never ceases to amaze me how few people understand the universality of Pareto’s law. They do not expect it. They seem astounded when a report is issued that states that Pareto’s distribution applies.

Google News reported several stories on this report, as if there were anything significant about this report on credit errors. Nothing is significant about it. Had the statistics involved been different from those reported, that would have been significant. That would have called for special investigation of the data behind the report. Either the data were being faked, or this was some kind of miracle or catastrophe.

If somebody had reported that 10% of the credit reports have errors in them, I would have regarded this as newsworthy. In fact, I would have regarded as newsworthy if 15% are filled with errors. A miracle! Let us rejoice!

There is no doubt that 25% would indicate a very serious situation. If it had been 30%, it would have indicated the need for some kind of urgent reform of the credit-reporting systems. But any system that produces errors for 20% of the people involved is operating smoothly. It is business as usual. Anyone who spends a lot of money to reform such a system is wasting a lot of money.

If you are in the 20%, try to get it fixed. If you are in the 5%, you must get it fixed.

On some list, you are in the 20%. That is normal. Fix  it if you hear about it. Otherwise, forget about it.

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3 thoughts on “21% of Credit Reports Have an Error. What About Yours?

  1. I had one of those errors: a tax lien that was paid before it was filed… in 2004. Didn't know it was there. I went to one of those "Free" credit report companies: it cost me over $100 by the time I got the monthly charge stopped and the three credit report statistics…

    Maybe I'm in the wrong business.

  2. I happened to watch part of the 60 Minutes show about this awhile back and the most disturbing fact was that some of the disputed mistakes were impossible to correct. Some unfortunate victims had tried for years with no results. All the institutions involved had outsourced their service departments to India or elsewhere and the people there had no way to even access the information or change anything. A bad rating and NO WAY to correct it.

  3. Are there another 20% of the errors favoring the person in the report? Are 1% of those greatly in their favor?

    One can err high and one can err low. It's usually a bell curve about the center. So are half of the errors the press noted, 10%, errors on the high side, not low?