Do we finally have the story straight?
For years there's been an ongoing debate about accuracy of credit reports. Various studies have claimed that 3 to 25 percent of reports contain errors. The study released in May 2011 by the Policy and Economic Research Council claimed that 19.2 percent of credit reports contain errors, but less than 1 percent of corrected errors led to significant increases in credit scores. The main issue with this study has been that it was initiated and paid for by the Consumer Data Industry Association, a trade group for the credit bureaus.
New research unveiled
Now, the FTC has released its own eight-year study on the accuracy of credit reports and the financial impact of credit report errors. Here are some of the key findings:
How bad can an error really be?
The FTC study reveals that 5 percent (instead of the previously believed 1 percent) of consumers have errors on their credit reports that could result in serious financial ramifications. A 25-point increase in your credit score could mean two things: better approval odds and lower interest rates. Let's look at the example of applying for a mortgage.
From the mortgage industry we know that you pretty much need a credit score of 620 just to get approved for a home loan. If you have an error that's depressing your would-be approvable score to a guaranteed-denied 600, you'll be out of luck and hit with a hard inquiry just for applying for that mortgage.
Let's say you have a score of 700, but it would be a 725 if you corrected a serious error on your credit report. You apply for your mortgage and get approved, but because you're not in the ideal range of 720 or higher, you'll end up paying thousands of dollars extra in interest over the life of your home loan.
So, can credit report errors be a big deal? Yes, absolutely.
So, what can you do?
The good news about the FTC's report is that the eight-year investigation revealed that most people (80 percent) who filed a dispute about an error on their report saw at least some change in their credit report as a result.
It can take some time to correct an error, but if it's at all possible that you can, you should. Follow the guide in 5 Steps to Cleaning Up Credit Report Errors. If you prefer to skip contacting the credit bureaus altogether, go for a direct dispute with the information provider reporting the error to the bureaus.
Bethy Hardeman writes on credit, personal finance and the economy for CreditKarma.com, a free credit management website that helps more than 10 million people access their credit score for free. Find her on Google Plus and Twitter.
This article originally appeared on the Credit Karma Blog.