Credit Reports and Scores

Credit scores are used to evaluate consumer credit risk. They are also a significant factor in determining whether a consumer qualifies for credit, how much credit is made available, the cost of the credit, and under what terms. Credit scores are calculated from credit reports. These reports are detailed statements that include information on your credit activity. Among the factors included in credit reports are payment history, amounts owed on debt, length of credit history, whether new credit accounts have been opened, and the mix of credit a consumer has. Consumers’ credit records are primarily compiled by Experian, Equifax, and TransUnion. These are the three nationwide credit reporting agencies (also known as credit bureaus). 

Industry sources estimate that credit scores are a determining factor in 90 percent of all consumer credit decisions in the U.S. Despite the importance of credit scores, many credit reports are inaccurate. In 2016, consumers disputed 91 million items on credit reports, according to an investigation by the Senate Commerce Committee. 

The Fair and Accurate Credit Transactions Act of 2003 allows consumers to obtain one free copy of their credit report every year from each of the three national credit bureaus. Most recently, the Economic Growth, Regulatory Reform, and Consumer Protection Act of 2018 allows consumers to freeze or unfreeze their credit reports for free at any time to block lenders’ access. This can be a means of protecting against identity theft and the opening of accounts in their name. 

Informational credit scores are often available for free on credit card statements, on banking apps, and through various online financial management tools. While these scores give a general sense of a customer’s creditworthiness, they do not reflect the actual score obtained when a borrower applies for a loan. Therefore, they cannot be used to negotiate a better rate. Actual scores will vary based on the particular credit bureau whose data was used to compute the score, the specific scoring algorithm, and different weighting factors based on the type of loan sought. For example, a score generated for a credit card application will differ from the score for an auto loan or a mortgage. 

Not all creditors report data to credit reporting agencies. Additionally, in some cases, only negative information is reported in a credit file—such as an unpaid phone bill—while positive information is not included. As a result, not all relevant credit information may be included in the reports. 

Credit scores during declared emergencies: During public-health emergencies, natural disasters, and other declared emergencies,  consumers may be unable to make payments to creditors through no fault of their own. They may also seek accommodations with creditors. However, credit reporting agencies do not always take these external factors into account. As a result, consumers may find that an emergency harmed their credit, making it more difficult for them to recover financially. Providing them with access to more frequent free credit reports could help them improve their credit, for example, by allowing them to challenge a negative item. 

Alternative data: According to the Consumer Financial Protection Bureau (CFPB), 11 percent of Americans—some 26 million people—are “credit invisible” because they have no credit history with any of the nationwide credit reporting agencies. An additional 19 million have too little history to receive a credit score. Black and Hispanic/Latino consumers are more likely than white and Asian consumers to be credit invisible or have unscored credit records. People with low incomes are also more likely to fall into these categories. 

Allowing credit bureaus to collect and analyze new types of data, such as rent and utility payments, could enable more Americans to have a credit file and a credit score. However, automatically providing this data to the nationwide credit bureaus would take away consumer control over that information. In addition, some people who already have a good credit score might see theirs go down. As such, it is important to incorporate consumer protections if alternative types of data can be used, such as requiring meaningful affirmative consent from consumers to collect, analyze, and report alternative data.  

Medical debt reporting: The CFPB has found that 20 percent of Americans report having medical debt in collections. As of the second quarter of 2021, nearly 60 percent of debts in collection on credit reports were from medical bills. There was an estimated $88 billion in medical debt on 43 million credit reports.

Even consumers with comprehensive health insurance are affected.  The CFPB found that Americans age 65 and older, almost all of whom are covered by Medicare, have higher out-of-pocket health costs than any other age group. In 2020, almost 4 million people age 65 and older reported having unpaid medical bills.

Yet medical debt is not acquired in the same way that other debt is and is not an indication of how creditworthy individuals are. People often have no choice but to take on medical debt, which frequently is the result of unforeseen and urgent circumstances. Patients cannot typically comparison-shop for services, as pricing is not transparent. And billing errors are common, particularly among older adults, who are more likely to have more than one source of insurance. 

Noncredit uses of credit scores: Credit scores have been designed specifically to measure the likelihood that a borrower will pay on time or default upon a credit obligation. They are not designed for other purposes. Increasingly, however, credit scores and credit reports have begun to be used by employers, utility companies, and insurance companies, among others, to determine a person’s suitability or qualifications. This creates severe disadvantages for the millions of Americans with limited or flawed credit history who may be denied a job or utility services. 

Moreover, there are deep and serious disparities in credit scores by race and ethnicity, and some disparities by income. As a result, this practice can mean that Black Americans, Hispanic/Latino Americans, and people with low incomes are unfairly denied access to jobs and affordable products and services. In addition, credit reports often contain inaccuracies. The Federal Trade Commission found that 20 percent of consumers had verified errors in their reports, with 5 percent (over 10 million consumers) having an error so serious that it would cause them to be denied or pay more for credit.