Credit reporting is the process of collecting individuals’ and businesses’ histories of borrowing and repaying money, and providing that information in the form of a credit report or credit score. A credit score is usually simply a number, while a credit report may contain detailed history of debts, timely and untimely payments, bankruptcies, and other events. Credit checks have long been required prior to taking out a loan or leasing an apartment, but they are now often required in many other instances, from opening a bank account to applying for a job. Having an accurate credit report is an important consumer right, but nearly every aspect of credit reporting is handled by private entities with little transparency. Federal law and industry standards offer consumers some protection from adverse information, but consumers must often take the initiative to monitor their credit histories.
Credit and Credit Reporting
Private companies known as consumer credit reporting agencies (CRAs) collect information from various sources and convert them into reports on individual consumers. The three most prominent CRAs are Equifax, Experian, and TransUnion. They obtain data from sources like lenders, credit card companies, utility companies, debt collection agencies, and court records. They use information like total amount of outstanding debt, total length of credit history, and total amount of available credit in order to calculate a consumer’s credit score. Some CRAs have created their own credit score system, but the FICO score is still the most common type.
The CRAs have developed largely automated processes for collecting and aggregating the massive amounts of consumer information they receive. This means that the process of organizing data is mostly done by computers using complex algorithms, and that rather basic errors might go unnoticed. Incorrect or false information might be reported about a consumer, or a CRA might mistake one consumer for another with a similar name. Schemes involving credit card fraud or identity theft could result in significant negative information in the credit history of an innocent person.
An old saying among computer programmers is “garbage in, garbage out.” In credit reporting, if a CRA’s algorithm receives inaccurate or incorrect information, it will produce an incorrect credit score. Federal law has attempted to address these concerns in several ways.
Federal Consumer Statutes
The Fair Credit Reporting Act (FCRA) directly regulates CRAs by requiring them to provide creditors with information about their files, to allow the consumer to dispute information in the file, and to verify the accuracy of disputed information. If a CRA removes negative information based on a consumer’s dispute, the FCRA requires it to notify the consumer in writing before reinserting that information. CRAs cannot keep negative information in a consumer’s file for longer than seven years from the date of the delinquency, with exceptions for bankruptcies, which can remain in the file for 10 years, and tax liens, which can remain for seven years from the date of payment.
Credit Reporting Industry Standards
The Consumer Data Industry Association (CDIA), the trade organization for CRAs, has produced standard formats for consumer credit data. The most recent standard is known as Metro 2.
Annual Credit Reports
The Fair and Accurate Credit Transactions Act (FACTA) of 2003 amended the FCRA to improve consumer access to credit information. It requires CRAs to make a free credit report available to consumers once a year. The Federal Trade Commission (FTC), with the assistance of the three major CRAs, set up a website, AnnualCreditReport.com, for this purpose. The site has unfortunately spawned multiple imitators that provide a “free” credit report in exchange for a paid subscription. The FTC has pursued some of them based on consumers’ false advertising complaints.