If you took out a loan earlier this year, you’ll likely hear from your bank about an error that may have been part of your lending decision.
Equifax, one of the top three credit reporting companies, announced this week that a coding issue led to the company providing inaccurate consumer credit scores to lenders between March 17 and April 6. Street Journal.
While most scores saw no significant difference, Equifax said, a significant number — fewer than 300,000 — saw a shift of 25 points or more due to error. This is more than enough to cause a different lending decision.
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Equifax said in its announcement that it is working with its clients – that is, lenders – to determine the “actual impact on customers”. The company did not respond to a CNBC query seeking details on how consumers were notified and what they could expect if they were among those affected.
The disclosure also led to a class-action lawsuit against Equifax in the US District Court in North Georgia, NBC News reports. The lawsuit seeks a jury trial for damages to affected consumers.
Why does a credit scoring error matter
As consumers know, credit scores play a big role in determining whether you are approved for a loan or credit card, and if so, what rate of interest or fees you will pay. The higher the score, the better the terms you can qualify for (and vice versa).
FICO scores – which typically range from 300 to 850 – are what most lenders use to inform their decisions. For mortgage and auto loans, there are generally 20-point ranges within this range, each tied to specific loan terms, said Al Bingham, credit expert and mortgage loan officer at Momentum Loans.
For example, if your score falls into the 700 to 719 category, you will receive the same GPA regardless of whether your score is 700 or 719.
“As long as the change in Equifax credit score remains within that limit [band]Bingham said.
However, if the error causes the score to jump outside of that range in one direction or another, “it becomes an issue with pricing and fees,” he said. In other words, those 300,000 or so consumers whose scores were wrong by 25 points or more either received terms that were worse than they should have—or might have been rejected outright—or qualified for better terms than their actual score would allow.
How do you know if you have been affected by a coding issue
It is not clear when consumers will hear directly from their bank or other lender if they are materially affected by an inaccurate outcome. A spokesperson for JPMorgan Chase, the largest US bank, said, “We are working proactively with Equifax and our customers to deal with [the issue] on a case-by-case basis.”
If you are wondering if you could be affected because you took out a loan (or tried but were denied) within the affected time frame, you should be able to check your documents from the transaction to see if the lender provided your FICO score in said Bingham Ann Disclosure Forms.
Know that lenders treat various consumer loans differently when it comes to the information they get to make a lending decision. For auto and personal loans, banks typically require only one of three large credit reporting firms — Equifax, TransUnion or Experian — for a score, Bingham said. So if you don’t see Equifax in your papers, you won’t be affected.
However, keep in mind that even if you find out that Equifax has submitted your score to your lender, this does not mean that the number was not accurate enough to alter the terms of your loan.
Added complications for mortgage applicants
For mortgages, it can be more complicated to determine how a false result will affect the terms of the loan for which you are eligible.
Bingham said that lenders check the FICO score from all three of these companies and use the broker — that’s what is disclosed to the mortgage applicant.
“If the Equifax score has been compromised to the point that it has fallen or increased below or above one of the other FICO scores, that presents an even greater challenge,” he said. “This means that an Experian or TransUnion result was used and should not be done.”
Or, he said, an inaccurate Equifax score could be the mean the lender is using.
“It would be really difficult for any lender or consumer to correct the Equifax FICO score [that was used]Bingham said.