Love them or hate them, credit reports have a massive amount of influence over your life. Your credit reports are used when you apply for a mortgage, auto loan, credit card, apartment, a job, a mobile phone, public utilities, insurance coverage… the list goes on and on. It’s next to impossible to apply for a service or an extension of credit without your credit reports being part of the screening or underwriting process.
As much as you might like to change or avoid the system, the fact of the matter remains that your credit reports are used to help others make decisions about you. Lenders, employers, collection agencies, landlords, insurance companies, and even car rental companies rely on credit reports to guide them in their day-to-day dealings with consumers. Your current lenders can even access your credit reports to determine whether or not they wish to continue doing business with you, and under what terms. It may sound harsh but the cold hard truth is that if you ignore the importance of maintaining clean credit you will suffer the consequences.
Where It All Began
Now that we’ve touched on the importance of your credit reports, here is a look at where the information on your credit reports comes from and how your credit reports are built. Most people are familiar with the names of the three major credit reporting agencies – Equifax, Trans Union, and Experian. These companies are commonly referred to as the “Big 3” or “CRAs” (for Credit Reporting Agencies) However, once upon a time credit reporting was not nearly as centralized of a process.
Before the existence of the Big 3 there were hundreds of smaller credit reporting agencies. These agencies were local and were generally referred to as merchants associations. Local businesses and service providers would report the payment history of their customers to these small local merchants associations. Then, other businesses and service providers could consult these records when a new customer applied for financing in order to help the businesses make more informed decisions before granting new credit.
Through acquisitions and mergers these smaller merchants associations slowly began to gobble each other up and their databases began to grow so that they covered much larger areas of the country. Eventually, the Big 3 came to dominate the credit reporting market as they still do today. Yes, some smaller credit reporting agencies still exist but the majority of lenders almost exclusively rely on credit reports from Equifax, Trans Union, and/or Experian.
Credit reports do not create themselves. There is a detailed and complex process taking place behind the scenes which enables lenders to access and review your credit history with a few keystrokes. In order to understand the credit reporting process it is best to begin by first taking a look at the players involved in compiling and delivering your credit reports.
1. The Credit Reporting Agencies (CRAs)
While Equifax, Trans Union, and Experian all do essentially the same things, it’s important to understand that they are competitors and not partners, as many consumers incorrectly believe. They do not share an infrastructure or share their data and no, they are not government agencies.
The CRAs compile and maintain their own individual credit file databases. Each CRA has over 200 million consumer credit files.The information contained in these files is likely similar across the board, but certainly not identical. As a result, if you pull a separate credit report directly from each, you’ll probably find some differences between the reports. These differences commonly include things like as missing accounts, different account information, different payment histories on specific accounts, inconsistent addresses, and so on. The differences between your three credit reports are part of the why you also have three different credit scores.
2. The Data Furnishers (DFs)
The information housed by each of the CRAs generally (though not always) comes from lenders and collection agencies, referred to in the credit reporting world as data furnishers. Data furnishers supply the CRAs with information regarding your account management history and that information is used to help create your credit reports.
The data furnishers provide this information to the CRAs at no cost, so the CRAs do not pay data furnishers for your information. The information is given to them free and voluntarily. Furthermore, these data furnishers will actually turn around and buy this same information back from the CRAs for a fee in order to access your credit reports. It’s certainly a strange business model.
It is important to understand who makes the rules that govern our industry. Credit reporting is a completely voluntary process, but heavily regulated. There is no law that forces a lender or collection agency to become a data furnisher and share account management information with the CRAs. There is also no law that forces the CRAs to accept information from a lender or collection agency. But, when you do choose to put something on someone’s credit report you are then compelled to abide by the rules.
The primary federal law that governs credit reporting is the Fair Credit Reporting Act (FCRA). Originally passed in October of 1970, the FCRA has been amended numerous times over the past 4 and 1/2 decades. Most importantly for consumers, the FCRA provides you with a long list of rights and protections in the credit reporting arena – rights that data furnishers and especially the CRAs must heed unless they wish to face some potentially serious monetary consequences (i.e. lawsuits and fines). The law is extensive, over 108 pages long in fact, and includes a considerably long list of consumer protections. Here are a few of the highlights:
1. Time Limitations on Credit Reporting
The FCRA places strict time limits on negative credit reporting. There is no minimum amount of time required for credit reporting, but there is a maximum amount of time for the bad stuff. The good stuff can remain forever, as there is no law requiring that it ever be removed.
The time limit depends on the type of information that appears on your credit reports. Although most negative items must be purged from your credit reports eventually, there are a few exceptions to this rule. There is no requirement under the FCRA to remove positive information from your credit reports, though the CRAs do generally remove closed, positive accounts from your reports after 10 years as a matter of policy.
The 7 Year Club – The majority of derogatory information on your credit reports is required to be removed after a period of 7 years. Late payments, foreclosures, collection accounts, charge-offs, judgments, released tax liens, settlements, and repossessions are a few examples that fall into the category of items that can remain on your credit for no more than 7 years.
The 10 Year Club – Bankruptcies make up the list of credit report items that are permitted to remain on your credit reports for no more than 10 years. More specifically, a Chapter 7 bankruptcy must be removed from your credit file no later than 10 years from the date filed. A Chapter 13 bankruptcy must be removed from your credit no later than 7 years from the date discharged, but not to exceed 10 years.
The Forever Club – Much to the chagrin of many consumers, there is a small list of negative items that are not required to be removed from your credit reports, ever. Unpaid tax liens and unpaid federal student loans are both members of this group. The CRAs may maintain these items indefinitely if they wish to do so.
The Right to Dispute Errors
If you find items appearing on your credit reports which are questionable, outdated, or with which you disagree, you have the right to file a dispute with the CRAs. Disputing an item does not automatically guarantee the removal of the account, but it does force the CRAs to conduct a “reasonable investigation” into your claim and to either verify the account as accurate or delete it from your credit reports. You have the right to dispute anything on your credit reports with which you disagree and the CRAs generally have 30 days (though sometimes 45 days) to investigate your claim. There is no cost to file a dispute, at least not for the consumer.
The Right to “Opt Out”
You might not realize it but the CRAs are permitted to sell your personal information to any company who wishes to send you a “firm offer of credit” such as a credit card or a loan (check your mailbox today and you’ll likely find at least one such offer). However, you also have the right under the FCRA to opt out from having your information sold, if desired. To opt out simply visit www.OptOutPrescreen.com and fill out a request form. You can opt out electronically for a period of 5 years or you can mail in a request to opt out permanently. Opting out will reduce the amount of mail you receive and also reduce your exposure to credit card fraud.
Free Credit Reports
Thanks to the Fair and Accurate Credit Transactions Act (FACTA), which amended the FCRA in 2003, you have the right to access a free copy of each of your credit reports every 12 months. Although these free reports have been available to U.S. consumers for over a decade, only small fraction of them are claimed each year.
Limitations Access to Your Credit Information
If you were not already aware, you just learned that the CRAs are allowed to sell your credit report information to other companies for marketing purposes unless you exercise your right to opt out. While this may seem like an invasion of your privacy, the FCRA does in fact place some strict limitations regarding who else is allowed to access your credit reports. In order for any entity to access your credit reports it must have what is referred to as “permissible purpose” to do so according to the FCRA. Some of the most common examples of “permissible purpose” include the following:
Lenders – When you apply for a loan or financing of any kind from a lender a copy of your credit report may be accessed. Your written permission is not required.
Insurance Underwriting – Your credit reports may be viewed by companies who write insurance policies if you are applying for new or continued coverage. Your written permission is not required.
Employers – Employment screening constitutes another permissible purpose to access your credit reports. However, in the case of employment screening your written and overt consent is required before accessing your credit reports. Additionally, you may have heard that employers will consider your credit scores, but that is a myth. Credit reports, not scores, are provided for employment screening uses.
Court Orders – Your credit reports may be accessed under a court’s order.
Consumer Disclosure – You have the right to check your own credit reports as often as you like, though there are limits regarding how often the CRAs have to provide you a report free of charge.