Credit Reports and Scores

Background

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. 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. 

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. 

Consumers are generally knowledgeable about how credit scores are used. But not all are aware the scores are used to measure the risk of loan repayment. Despite the importance of credit scores, many credit reports are inaccurate. In 2016, 91 million items on credit reports were disputed by consumers, according to an investigation by the Senate Commerce Committee. 

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. 

During declared emergencies, such as natural disasters or pandemics, 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, 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.  

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. 

CREDIT REPORTS AND SCORES: Policy

CREDIT REPORTS AND SCORES: Policy

Consumer protections in credit reports and scores

Regulators should provide consumer protections in credit reporting. This includes: 

  • Requiring that information in credit reports have a logical nexus to creditworthiness, and  
  • Protecting against erroneous information in credit reports. 

    Consumers should be provided greater access to credit files and allowed to correct inaccurate information more easily. 

Creditors who furnish customer information to credit reporting agencies should provide full consumer payment information. 

The CFPB should vigorously enforce both the Fair Credit Reporting Act and the Fair Credit Billing Act. Practices of credit reporting agencies need to be reformed. 

Credit reporting agencies and other companies that provide general credit scores to consumers should disclose that these scores are strictly informational and are not used to determine creditworthiness for a particular loan. Ideally, consumers should be able to use higher informational credit scores to support their case for a lower-cost loan when applying for credit. 

Credit bureaus should be required to restrict or suspend negative credit reporting during declared emergencies. To the extent possible, this process should be automatic. 

Consumers should have regular and free access to their credit reports during declared emergencies. They should be able to receive a free credit report from each credit bureau at least once per quarter during declared emergencies. 

Alternative credit reporting

Policymakers should ensure consumer protections in the use of alternative data in credit reports and scores. Alternative data should be used to expand access to affordable credit and should not lead to consumer harm. 

Alternative data should have a logical nexus to creditworthiness. Data likely to lead to consumer harm, such as alternative financial service products like payday loans, should not be reported. 

Credit bureaus should be required to foster transparency by providing consumers accurate and understandable information. This information should include the type of data they wish to collect, how they will use the data, and any potential consumer harms of alternative data use (see also Consumer Data Privacy and Security Principles). They should be required to obtain meaningful affirmative consumer consent for each type of alternative data to be collected (see also Consumer Choice and Control policy). Consumers should be able to rescind their consent at any time. Any algorithms that analyze alternative data to determine a credit score should be fair, transparent, and accountable (see also Algorithmic Accountability). 

Noncredit uses of credit reports and scores

Credit reports and scores should be used as an underwriting tool for consumer loans. They should not be used for other purposes.