When I work with divorce cases, my team and I sit down with the client and map out a strategic plan of all the things we need to uncover and discover about the marital family. As part of the divorce planning process, one of the things we do is to pull a credit report.
In my professional networking I found Georg Finder, who below, has explained the major differences in credit reports. Specifically, he shares tips and insight to which of these credit reports is better for the client and the settlement process. Georg is a Credit Damage Evaluator based out of Fullerton, California.
What are the basics to know about credit reports?
The first thing to know about credit reports is that there are 2 kinds:
A commercial subscriber report - sold only to business subscribers or commercial subscribers. It is written in code.
A consumer disclosure report - often known as the free credit report., is written in plain language. No codes allowed.
All consumer credit reports are available through either TransUnion, Experian, or the CBI company, which publishes the Equifax report. Most people will only go with one of these 3 companies, but it is in consumers’ best interests to get all 3 credit reports, or they will have an incomplete picture. Credit reports do not look the same, and they are very competitive; that's why all 3 are required.
Why are there two kinds of the consumer credit reports?
The consumer disclosure report (free report) has been around since about 1990. In 1991 it became obvious to lawmakers that, although in 1970 consumers had been given the right to know what was in their credit report, they couldn't read it because it was in code - if you didn’t know the code, it was gibberish. They came up with the idea of a consumer disclosure report under threat of lawsuit by 19 states. One stipulation of the agreement was that the credit bureaus would provide a code-free, plain English report to the consumer.
Over the years from 1990 to 2012, most people assumed that the information in the subscriber report and the information in the free consumer credit report would be the same - because everyone assumed that they were based on the same information.
The Wall Street Journal conducted a study, and discovered that assumption was not true. They found that free credit reports were not as accurate because they contained misinformation, as well as missing information. The amount of error was calculated by The Wall Street Journal at a rate of approximately 20% - 40%. Unfortunately, these were not tiny details, but the kind of information that either rejects or approves a credit application.
What recent factors occurred to produce more accurate credit scores?
In 2012, The California Public Interest Research Group published a new study, and they found that the difference of information between the 3 credit rating companies had gone from 20% - 40% to about 70%, and that is a kind of information that is decisive to credit granting decisions.
One of the other features we have found with free credit reports is that typically the scores are higher than what is given to a subscribing business that looks at a credit report. Lenders and employers and insurance companies will not even look at a free credit report as part of an application.
The most authorized person to obtain a credit report is the person whose name is on the report. That person can go to a commercial lender and tell the lender, "I would like to know how much I could be pre-approved for in applying for a loan." Most lenders, if they think a person is going to be approved, will pull a full-fledged credit report on the potential borrower, and are often willing to give that information to the potential borrower in the hopes of earning their business.
At Strada Management, as part of our divorce planning and wealth management process, we pull the client’s report and review it together for discrepancies and completeness. We compare all three brands of reports to be sure all agencies are reporting the same information. If the client needs to purchase a new car or a new home, we use the credit report as a base line to negotiate property settlement agreements, based on their capabilities.
For example, a previous client needed to purchase a new car, but her credit score alone was not high enough for an auto-loan approval. We negotiated with her soon to be ex -husband so that his credit could be used to in conjunction with hers in order to get the approval for a new vehicle before the divorce was official.
Credit reports can be important components in a divorce, but in light of the shortcomings of typical free credit reports, it may be prudent to delve deeper. Join me next time when I tackle the subject of reading and understanding a subscriber report.
Jennifer Failla, CDFA™
Principal, Strada Wealth Management
Toll Free: 866.526.7098
Email: info@stradamanagement.com