The Credit Game – the FCRA, Credit Reports and
A. The Fair Credit Reporting Act (FCRA) - Background
Federal law, the Fair Credit Reporting Act (FCRA), was enacted in
1971 giving people the right to see their credit records at credit
reporting bureaus. Designed to improve the confidentiality and
accuracy of credit reports, the law is enforced by the Federal Trade
Commission (FTC) and state consumer protection agencies.
Individuals may challenge and correct negative aspects of their record
if they can prove there is a mistake. Consumers may also submit
statements explaining why they received certain negative credit
marks. Congress passed amendments to the FCRA that went into
effect on October 1, 1997 which augmented consumers' privacy rights
and further protected the accuracy of credit report information.. The
amendments state that when a consumer disputes information, the
consumer reporting agency and the original furnisher of the
information must investigate the claim. Agencies must finish their
investigations within 30 days and report their results back to
consumers. The law also stipulates that there be a "date certain" for
the calculation of the length of time that information can remain in
consumer report files in situations involving collections or charge-offs.
The FCRA was further strengthened by the passage of the Fair and
Accurate Credit Transactions Act of 2003 (FACTA), which, among
many other provisions, gave consumers the right to receive one free
copy of their credit report annually.
The FCRA represents the first federal regulation of the consumer
reporting industry, covering all credit bureaus, investigative reporting
companies, detective and collection agencies, lenders' exchanges, and
computerized information reporting companies.
The consumer is guaranteed several rights under the FCRA, including
the right to a notice of reporting activities, the right of access to
information contained in consumer reports, and the right to the
correction of erroneous information that may have been the basis for a
denial of credit, insurance, or employment. When a consumer is
denied an extension of credit, insurance, or employment owing to
information contained in a credit report, the consumer must be given
the name and address of the credit bureau that furnished the credit
report. Consumers are also entitled to see any report that led to a
denial, but agencies are not required to disclose risk scores to them.
Risk scores (or other numerical evaluation, however named) are
assigned by consumer reporting agencies to help clients interpret the
agency's report. Credit agencies may not report adverse information
older than seven years or bankruptcies older than ten years.
The provisions of the FCRA apply to any report by an agency relating
to a consumer's creditworthiness, credit standing, credit capacity,
character, general reputation, personal characteristics, or mode of
living. The FCRA covers information that is used or expected to be
used in whole or part as a factor in establishing the consumer's
eligibility for one of four purposes: (1) employment; (2) credit or
insurance for personal, family, or household use; (3) government
benefits and licenses to operate particular businesses or practice a
profession; and (4) other legitimate business needs. Under the FCRA,
an agency may also furnish a report in response to a court order or a
federal grand jury subpoena, to a written authorization from the
consumer, or to a summons from the Internal Revenue Service.
The FCRA creates civil liability for consumer reporting agencies and
users of consumer reports that fail to comply with its requirements.
B. Consumer reporting agencies
Consumer reporting agencies (CRAs) are entities that collect and
disseminate information about consumers to be used for credit
evaluation and certain other purposes. They hold the databases which
are the origins of a consumer's credit report. CRAs have a number of
responsibilities under FCRA, including the following:
1. Provide a consumer with information about him or her in the
agency's files and to take steps to verify the accuracy of
information disputed by a consumer. Under the FACTA laws
passed in 2003, consumers are now able to receive one free
credit report a year. Free reports are obtainable at
2. Conduct reasonable investigations into consumer disputes about
incorrect information on their credit reports.
3. If negative information is removed as a result of a consumer's
dispute, it may not be reinserted without notifying the consumer
within 5 days, in writing.
4. CRAs may not retain negative information for an excessive
period of time. The FCRA spells out how long negative
information, such as late payments, bankruptcies, tax liens or
judgments may stay on a consumer's credit report - typically 7
years from the date of the delinquency. The exceptions:
bankruptcies (10 years) and tax liens (7 years from the time
they are paid).
The 3 big CRAs: Experian, Trans Union and Equifax, do not
interact with information furnishers directly as a result of consumer
disputes. They use a system called E-Oscar.
C. Information Furnishers
An information furnisher, as defined by the FCRA, is a company that
provides information to consumer reporting agencies. Typically, these
are creditors, with which a consumer has some sort of credit
agreement. (credit card companies, auto finance companies and
mortgage banking institutions, to name a few). However, other
examples of information furnishers are collection agencies (third-party
collectors), state or municipal courts reporting a judgment of some
kind, past and present employers and bonders.
Under the FCRA, these information furnishers may only report to a
consumer's credit report under the following guidelines:
1. They must provide complete and accurate information to the
credit rating agencies.
2. The duty to investigate disputed information from consumers
falls on them.
3. They must inform consumers about negative information which
has been or is about to be placed on a consumer's credit report
within 30 days.
D. Users of the information for credit, insurance, or
Users of the information for credit, insurance, or employment purposes
have the following responsibilities under the FCRA:
1. They must notify the consumer when an adverse action is taken
on the basis of such reports.
2. Users must identify the company that provided the report, so
that the accuracy and completeness of the report may be
verified or contested by the consumer.
E. Likelihood of errors on a credit report
A large number of consumer credit reports contain errors. A study
released by the U.S. Public Interest Research Group in June 2004
found that 79% of the consumer credit reports surveyed contained
some kind of error or mistake. Other studies have reported different
fractions (from 0.2% to 70%), and many find around a 20-30%
significant negative error rate. As a result, many consumers frequently
invoke their rights under the FCRA to review and correct their credit
F. Fines for violations of the FCRA
Under section 15 U.S.C. § 1681s of the FCRA, a wronged party may
collect up to $1000 for each willful or negligent act which results in the
violation of the FCRA. Any person may file suit in local federal
court to enforce the FCRA.
G. Credit Scores
A credit score is determined by a numeric index estimating an
individual's creditworthiness and ability to repay financial obligations,
taking into account promptness in paying bills, length of credit history,
available credit actually used, bankruptcy, and other negative events,
and other factors. The three major American credit reporting agencies
all use variations of the scoring model originally developed by Fair
Isaac & Company, Inc., (FICO) under different names:
Credit Reporting Agency FICO Score Names:
Equifax - BEACON®
Experian - Fair Isaac Risk Model
TransUnion - EMPIRICA®
FICO scores range from about 300 to a high of 850, with a score
above 720 generally considered a "good credit" and a score below 600
a higher risk. Variations in credit scores can occur because credit
reporting agencies process information in a borrower's credit report in
Lenders, such as banks and credit card companies, use credit scores to
evaluate the potential risk posed by lending money to consumers and
to mitigate loss to bad debt. Lenders use credit scores to determine
who qualifies for a loan, for what interest rate, and what credit limits.
H. The FICO score and others
FICO is an acronym for Fair Isaac Corporation (traded publicly
under the symbol FIC) and refers to the best-known credit score model
in the United States. The FICO score is calculated using statistical
methods, developed by Fair Isaac, to information in one's credit file.
The FICO score is primarily used in the consumer banking and credit
industry. Banks and other institutions that use scores as a factor in
their lending decisions may deny credit, charge higher interest rates or
require more extensive income and asset verification if the applicant’s
credit score is low.
FICO scores are designed to indicate the likelihood of a
borrower being delinquent within the next 24 months. No public
information is available to determine what the scores mean in terms of
statistics. A separate score, BNI, is used to indicate likelihood of
The three major credit reporting agencies (also often, but inaccurately
referred to as credit bureaus) in the United States, (Equifax, Experian
and Trans Union) calculate their own credit scores, which go by
different trademark names as well as many different versions of the
The scores use a multiple scorecard design. Each version uses 10 or
more individual scorecards, and an individual is typically compared
with similar others. (For example, a borrower with two 30-day late
payments will be scored against a population with some minor
delinquencies.) An individual is then graded according to what
variables seem to indicate a repayment risk in that group. This feature
may cause a borrower with delinquencies to score in the same range
as a borrower without delinquencies.
Nearly all large banks also build and use their own proprietary
statistical models for credit scoring purposes, often in conjunction with
the FICO score or other outside scores.
The statistical models that generate credit scores are subject to federal
regulations. The Federal Reserve Board's Regulation B, which
implements the Equal Credit Opportunity Act, expressly prohibits a
credit scoring model from considering any prohibited basis such as
race, color, religion, national origin, sex, or marital status. Regulation
B also stipulates that credit scoring models must be empirically derived
and statistically sound. Furthermore, if an adverse action is taken as a
result of the credit score (e.g. an individual's application for credit is
denied) then specific reasons for the denial must be provided to the
individual. A statement that the individual "failed to score high
enough" is insufficient; the reasons must be specific.
Each of the credit reporting agencies has developed its own version of
the credit score intended to compete with Fair Isaac's score. Although
not as widely used, these scores (for example Trans Union's
"TransRisk" score or Experian's "ScoreX" and "PLUS" scores) are less
expensive than the FICO score. These scores are often derisively
referred to by consumers and lenders as "FAKO" scores, for they do
not use official Fair Isaac methodologies. The cost savings of a non-
FICO score are tempting to some banks and credit card companies,
who need an accurate risk assessment on millions of accounts every
year. For ease of use, these scores tend to be mathematically scaled
so that they fall in the same general range as the FICO score. Fair
Isaac offers scoring models for the U.S., Canada, and South Africa. It
also offers a "Global FICO" for many other countries.
I. Makeup of the credit score
The approximate makeup of the FICO score Fair Isaac discloses to consumers
Credit scores are designed to measure the risk of default by taking into
account various factors in a person's financial history. Although the
exact formulae for calculating credit scores are closely guarded
secrets, Fair Isaac has disclosed the following components and the
approximate weighted contribution of each:
35% punctuality of payment in the past (only includes
payments later than 30 days past due)
30% the amount of debt, expressed as the ratio of current
revolving debt (credit card balances, etc.) to total available
revolving credit (credit limits)
15% length of credit history
10% types of credit used (installment, revolving, consumer
10% recent search for credit and/or amount of credit
The above percentages provide very limited guidance in understanding
a credit score. For example, the 10% of the score allocated to "types
of credit used" is undefined, leaving consumers unaware what type of
credit mix to pursue. "Length of credit history" is also a questionable
concept; it consists of multiple factors - two being the oldest account
open and the average length of time an account has been open.
Although only 35% is attributed to punctuality, if a consumer is
substantially late on numerous accounts, his score will fall far more
than 35%. Bankruptcies, foreclosures, and judgments affect scores
substantially, but are not included in the simplistic pie chart provided
by Fair Isaac.
Further, Fair Isaac does not use the same "scorecard" for everyone.
The scorecards are segmented so that there are over 100 different
actual scoring models that are applied to different individuals based on
different ranges of input values (some scorecard segmentations
include: age, depth of credit history, etc.) The implications of this
segmentation are that while the approximate weighted contribution
above may be an average across all scorecards, individuals will receive
different scores or weightings based on the scorecard segmentation
that they fall into. Some consumers have noticed their scores
decreasing by small amounts for no apparent reason.
Current income and employment history do not influence the
FICO score, but they are weighed when applying for credit. For
instance, an unemployed individual with no other sources of income
will not usually be approved for a home mortgage, regardless of his or
her FICO score.
There are other special factors which can weigh on the FICO score.
Any monies owed because of a court judgment, tax lien, or
similar carry an additional negative penalty, especially when
Having above a certain number of consumer finance company
credit accounts also carries a negative weight (critics say that
this causes a vicious cycle, locking people into continuing to use
consumer finance companies).
The number of recent credit checks also can weigh down the
score, although the credit agencies claim to allow for credit
checks made within a certain window of time to not aggregate,
thus allowing the consumer to shop around for rates.
J. Range of scores
A FICO score generally ranges from 300 to 850. It exhibits a left-
skewed distribution with a US median around 725. 660 is generally
regarded as potentially sub-prime and represents an important break
point for creditworthiness. The performance of the scores is monitored
and the scores are periodically aligned so that a credit grantor
normally does not need to be concerned about which score card was
Each individual actually has three credit scores for any given scoring
model because the three credit agencies have their own, independent
databases. These databases are independent of each other and may
contain entirely different data. Many lenders will check an applicant's
score from each bureau and use the median score to determine the
applicant's credit worthiness.
K. Reasons for disputes on credit reports:
Types of accounts (individual/joint):
Charge off account
Credit card account
Payment history incomplete, inaccurate or omitted thus prejudicial:
No commencement date (month and year) of delinquency
immediately preceding the collection so as to determine
appropriate 7 year period
Not client’s account
No closing date of account is listed
No exact dates are listed to verify information
No balance/limit information given
On time payments information missing
Account has already been paid and nothing is owed – removal
Not client’s report
Not client’s address
Date reported not accurate
Bankruptcy information is incomplete
Payment and terms information is omitted – no specific dates
listed as to when it was entered or paid off
Bankruptcy is over 7 years old – removal requested