How Consumers Game their Credit Reports and Increase your Risk of Being Paid

How Consumers Game their Credit Reports and Increase your Risk of Being Paid

Consumers have access to plentiful information to help them increase their credit scores. Of course there is nothing wrong with that on the face of it. But when consumers use tricks to artificially inflate their credit score it can be a problem for small business owners. When that happens, it’s easy for merchants like you to extend credit to the wrong people at the wrong rate.

How specifically do people game their credit score? As it turns out, there are at least 5 easy ways to do so:

Credit score manipulation

1. Payment Timing

When it comes to credit scores, every point counts. And one of the easiest ways to pick up points is to time payments. Let me explain.

Credit scores are calculated based on a number of variables. One such variable is the consumers’ average outstanding balance. All a clever consumer has to do is find out which day of the month creditors report to the bureaus. Once they have that information they can send in their payments a day or two before the creditor reports. This way, the outstanding balance they report is zero or close to it. That translates into extra credit score points for the consumer even though (all things being equal) it doesn’t really reflect a stronger borrower.

When you review a consumer’s credit report, try to determine if they are using this trick to artificially inflate their score. If you see that the average balance on a credit account is very low month after month, you may be dealing with a gamer. Beware.

2. Aged Unused Cards

Consumers know that they get credit points for holding on to old credit cards – especially if they have no balance. Review your customer’s credit score carefully. Do you see lots of old credit entries with almost no activity? If so, this could just be another ploy this person is using to pump up their score without really making them a stronger borrower.

3. Offline Loans

If your customer borrows money privately, it is usually not reflected on their credit report. That means if JR Customer borrows money from their uncle, you won’t know about it. This is also the case when it comes to peer-to-peer loans.

If your borrower has an outstanding loan with one of these outfits the only way it currently shows up on their credit report is if they become delinquent. If they stay current on the payments, it may not show up on the report.

The problem is that if your borrower takes a large loan with a peer-to-peer lender, they might be making their payments but their debt ratio (and corresponding default risk) is much higher than you know about if you only review their credit report.

The best way to detect this kind of activity is to look at a few of the person’s monthly bank statements. If you see consistent payments to a third party and that third party is not shown on the credit report, it’s important to ask more questions and find out if something sneaky is going on.

Credit score in a credit report

4. Legal Tricks

There are legal remedies consumers have at their disposal to fight unfair marks against their credit. We can all agree that this is a good thing. But sometimes consumers use legal leverage to clean up negative credit items that by all rights should still be reported. That puts you at a disadvantage because you think you are dealing with a consumer who pays their bills when in fact they may not.

How do some consumers get away with this? As you probably already know, the Fair Credit Reporting Act mandates that credit bureaus and creditors can only report data that is accurate, verifiable and fair.

Accuracy is easy to prove one way or the other. But because negative data must also be verifiable and fair, it leaves the borrower a lot of wiggle room.

Take “verifiable” for example. The consumer may not have paid a bill, but if the reporting vendor can’t prove it, they have to instruct the credit bureau to remove that negative from the credit report. You might think it’s easy to verify a debt but it’s not always the case. Take for example the situation when a vendor changes its internal accounting system or is bought out or taken over by another firm. It may not be so easy for that company to produce the proof if the borrower demands to see it.

And the issue of fairness is even more subject to interpretation. Even if a consumer welched on a debt, creditors may be forced to remove that negative item if the data entry on its own doesn’t tell the entire story. If, for example, a borrower can produce a good reason for not paying the bill (like being sick or out of the country for example) they may be able to get the credit bureau to remove the negative information.

At the end of the day, this person still didn’t pay their bill and the store is still out the money. And if you do business with this person, you need to know about it because it increases the risks you take. Sadly, there really isn’t a good way to detect these kinds of tactics. The only possible solution is to try to get the consumer to produce multiple credit scores/reports over a period of time. This might expose problems like these but don’t hold your breathe. Not many consumers keep old credit reports – especially if they have new ones that look nicer.

In order to make sure you don’t get hood-winked by a consumer, you have to carefully inspect the credit reports and scores. Don’t just rely on this information at face value. Find out what is behind these reports and try to detect any funny business that may be going on. In addition, look over 3 or 4 monthly bank statements to insure that everything that should be reported is being reported.

Have you ever been tricked by a credit report schemer? What happened? How would you make sure it doesn’t happen again?

Neal Frankle

Neal Frankle is a Certified Financial Planner in Los Angeles. He is also the chief editor for WealthPilgrim, CreditPilgrim.com and MCMHA.