The Trouble with Credit Reporting Codes

In the world of credit reporting, there are a plethora of different codes that are used to convey multiple different messages, with each serving a specific purpose. It is helpful to know a little about what some of these codes are and what they accomplish. For example, when a data furnisher (creditor) signs a contract to report information to the credit bureaus (Experian, Trans Union, Equifax) they are assigned a code that they must use when they report. These codes indicate what their permissible purpose is to be able to pull credit reports. Beyond that there are codes that the data furnishers use to report the actual account. These codes can indicate whether it is a revolving account, installment loan, student loan, etc. There are also codes used to show if an account is delinquent, charged off, a foreclosure, etc. Not all codes are visible to the average consumer looking at their credit report, but it is important to know that on certain accounts, some codes can cause major problems for borrowers.

Problematic Accounts

Let’s look at two types of accounts that can cause the most problems. These types of accounts and the codes associated with them are something that we, as a third party CRA, get an abundance of questions about:

Time Shares. While not all time share companies report to the bureaus, there are quite a few that do. If a consumer is making their monthly payments on time, (including the maintenance fees) there should not be a problem. However, since Time Shares are shared properties between several different parties and used only during certain times of the year, a lot of people fail to see that they are considered a mortgage, even though there is property attached to the payments. Since there are not separate codes for Time Shares, they are usually coded as a “mortgage.” This becomes problematic if the consumer stops making their monthly/yearly payments OR their maintenance fees. At this point, the company that holds the Time Share can foreclose on the consumer’s portion of that property which will show up as a foreclosure on their credit report. The Time Share company will use “foreclosure codes” to report the account to the bureaus. And unfortunately, there is not a way to fix this unless the creditor agrees to remove the account completely from their credit report, which is unlikely to happen.

Home Improvement loans. These loans are not to be confused with Home Equity Lines of Credit (HELOC’s). Whereas a HELOC works on a revolving payment basis, a Home Improvement Loan is an unsecured fixed loan that a consumer takes out and pays off over time, just like a mortgage. This type of loan is normally taken out to make minor or even major changes to their existing home. While it is an unsecured loan, unlike a mortgage, the creditor in most cases reports it with “mortgage codes.” As with Time Shares, there are no separate codes for Home Improvement Loans. So, if a person defaults on the payments, it will typically read on their credit report as a foreclosure. It would seemingly make sense that since a home improvement loan is not secured by the home, it should be considered and coded as an installment loan. However, because the loan is to be utilized for the home, the creditor will normally report it with mortgage codes. Because of this, if the borrower defaults on the loan it will be reported with foreclosure codes instead of the “charge off code” associated with an installment loan. And again, unfortunately, there is nothing that can be done to fix this issue.

As stated before, all of these different codes are not always visible to a consumer looking at their credit report. Neither of these accounts may have the word “foreclosure” on them, even if that is what the code indicates. The account could just show past due and/or have several delinquent payments. There are things to look for within the account that will indicate that it is being coded as a foreclosure: first, look at all the delinquent payments individually. They should all be listed separately and if any of them have an “F” in front of the payment, this is a strong indication that it is being reported with foreclosure codes.

What To Do

As of 2023 approximately ten million households have a Time Share, and fifty million homeowners have some sort of home improvement loan. As with all credit, the most important thing to do is to make the payments on time every month. In the case of a Time Share, if it is no longer needed or wanted there are avenues a consumer can pursue to get out of their contract and no longer carry that obligation. Simply stopping payments is not the answer and could cause a great deal of damage to a consumer’s credit report.