Troubling Trends in the Rapidly Expanding U.S. Credit Reporting Industry: Q&A

Troubling Trends in the Rapidly Expanding U.S. Credit Reporting Industry: Q&A

June 21, 2011
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How do credit records affect  Americans? 

Credit reports and scores have a direct and growing impact on Americans' economic security and opportunity. They are increasingly being used by insurance companies, employers, utilities and even hospitals for a range of economic decisions despite. Yet the credit reporting system falls short on basic goals of fairness, accuracy, and transparency. Moreover, high unemployment, the foreclosure crisis, and other factors associated with the recession have combined to reduce Americans' credit standing just as credit information is becoming more widely used.  Through their credit reports and scores, individuals and families will continue to pay for a crisis they didn't cause well into the future.

Are credit reports accurate?

Credit records regularly exclude relevant information, include inaccurate information, and contain data about medical debt collections that reveals more about an individual's private health concerns than their overall credit worthiness. Recent research suggests that more than 20 million Americans could find material errors on their credit reports. 

Are credit records fair?

Credit reports largely mirror racial and economic divides, with African Americans and Latinos as well as low-income people, disproportionately likely to have lower scores. In turn, these communities are more likely to be offered high-priced loan products, which may contribute to more defaults, maintaining and amplifying historical injustice and diminishing access to the American Dream.

Are credit records transparent?

Credit reports are composed exclusively of information about individual consumers, but consumers lack unrestricted access to relevant credit information and must often pay fees to obtain their own credit scores.What are credit reports and scores? 

Credit reports and scores are products compiled by three large for-profit corporations - Equifax, Experian and TransUnion - in addition to a growing number of smaller companies reporting specialized credit information. Credit scores are distinct products, although they are often sold with reports. A credit score is a single number that is supposed to represent the likelihood that a borrower will make payments to a lender as agreed. There is no single methodology for producing credit scores. Credit reports are composed exclusively of information about individual consumers and typically include one's Social Security Number and employment history, information on each credit account the individual has established, and a list of everyone who has accessed the individual's report within the last 24 months. It will also include information on bankruptcies, foreclosures, liens and similar public record information. 

How are insurance companies using credit records?

Home and car insurers charge more to individuals with low credit scores, claiming that people with poor credit are more likely to make an insurance claim. However, this propensity might reflect unfair factors such as race or income: Consumers with poor credit may simply have fewer financial resources and be more likely to file a claim rather than "eating" the loss. ((How are employers using credit records? Six out of ten employers now use credit reports to evaluate job candidates, despite a lack of evidence that credit history correlates to job performance or likelihood to commit fraud. Credit reports and scores are experiencing "mission creep"-increasingly being used by insurance companies, employers, utilities and hospitals for a variety of economic decisions. Job seekers risk being caught in a Catch-22: Tthey can't pay their bills without a job, but can't get a job without because they have unpaid bills. The Equal Employment Opportunity Commission warns that using credit reports in hiring and firing may produce racially discriminatory decisions that violate federal civil rights laws.

How can credit records be made more fair and accurate?

The new Consumer Financial Protection Bureau (CFPB) is empowered to enforce the Fair Credit Reporting Act, write regulations, and supervise the large for-profit credit reporting bureaus. The CFPB should take steps to reduce the amount of erroneous information in credit reports and increase the transparency of credit reporting and scoring, while also mandating the elimination of information, like medical debt records, that has little relevance to future likelihood to repay debt.

How can policymakers act to restrain the growing use of credit checks for non-lending purposes?

Five states have acted to restrict the use of credit checks in hiring, and 20 more are considering legislation. The Equal Employment for All Act, pending in the U.S. Congress, would limit the employment use of credit checks nationally. State and federal legislation is also being considered to regulate other non-employment uses of credit information.

For more information and sources, please see Demos' report "Discrediting America."