The Contents of Consumer Credit Files

 

The Contents of Consumer Credit Files For purposes of this paper, credit reports are a form of “consumer report” as defined by the FCRA. Consumer reports generally are communications by a consumer reporting agency “bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living” used or expected to be used in determining a consumer’s eligibility for credit or insurance, for employment purposes, or other permissible purposes listed in the statute.15 As defined by the FCRA, the “file,” when used in connection with information on any consumer, means “all of the information on that consumer recorded and retained by a consumer reporting agency regardless of how the information is stored.”16 This paper refers to “credit files” as the information about a consumer that is contained in the databases of the NCRAs. 2.2.1 File Components Credit files have some or all of the following components.

 1. Header/Identifying Information: The header of a credit file contains the identifying information of the consumer with whom the credit file is associated including an individual’s name (and any other names previously used), current and former addresses, Social Security number (SSN), date of birth, and phone numbers. Not all credit files contain all of these identifying elements.17

 2. Trade lines: Trade lines are the accounts in a consumer’s name reported by creditors such as auto lenders, mortgage lenders, or credit card issuers. For each trade line, creditors that furnish information to consumer reporting agencies (referred to as “furnishers” under the FCRA) generally provide the type of credit (e.g., auto loan, mortgage, credit card), the credit limit or loan amount, account balance, the account payment history including the timeliness of payments, whether or not the account is delinquent or in collection, and the dates the account was opened and closed. If more than one consumer is listed as a borrower on a given credit account, the trade line information will appear in both consumers’ credit files ordinarily with information as to the relationship of the consumer to the account, such as authorized user. Trade line information may contain indicators such as whether the account is individual or joint, the account is involved in a bankruptcy filing, 

the device for accessing the account (e.g., a credit card or PIN) was lost or stolen, and, if closed, the reason for closure (e.g., paid off, closed at the consumer’s request). Credit files do not contain certain terms of the loans or credit lines such as interest rates, points, or fees and do not contain certain performance history such as purchases made using the account or payments made on the account. Additionally, credit reports do not contain information on a consumer’s income or assets. 

3. Public record information: The NCRAs’ files include public record data of a financial nature including consumer bankruptcies, judgments, and state and federal tax liens. Records of arrests and convictions generally do not appear on a consumer’s credit file, but other types of consumer reporting agencies, such as employment background screening agencies, include them. Other public records that do not appear in credit reports are marriage records, adoptions, and records of civil suits that have not resulted in judgments.18 CONSUMER FINANCIAL PROTECTION BUREAU, DECEMBER 2012 9 

4. Collections: Third-party collection items, reported by debt buyers or collections agencies on behalf of a creditor, are considered a separate category on a credit report by at least some of the NCRAs.

 5. Inquiries: A consumer’s credit file is required to list every entity that accessed the file in the last two years for employment-related uses and for at least the last year for credit uses and most non-employment uses (e.g., tenant screening, insurance, government licenses or benefits).

19 Some of the NCRAs go beyond legal requirements and list credit inquiries for two years. The NCRAs have two major classifications of inquiries: “soft” inquiries and “hard” inquiries. Hard inquiries are typically the product of consumer-initiated activities such as applications for credit cards, to rent an apartment, to open a deposit account, or for other services. In contrast, soft inquiries are generally user-initiated inquiries like prescreening.b Only hard inquiries will appear in credit reports obtained by creditors and other users. A consumer’s file also has information on whether the consumer has initiated a security freeze, fraud alert, active duty alert, or filed a consumer statement on his or her file. 2.3 Credit Reports Credit reports are consumer reports provided by NCRAs or other CRAs to lenders and other users. Credit reports generally contain information in the consumer file that is reportable to the end user. 

The FCRA limits with some exceptions how long a credit bureau can communicate certain adverse information in a credit report.20 Many adverse items including records of late payments, delinquencies, or collection items typically stay on a credit report for up to seven years.21 Likewise, civil suits and civil judgments typically stay on the report for no more than the longer of seven years or the governing statute of limitations, while paid tax liens typically cannot be reported more than seven years after the date of payment.

22 Credit reports generally cannot list bankruptcies for more than 10 years after the order for relief or date of adjudication, except that repayment plans are only reported for seven years.23 There are also restrictions on communicating a medical service provider’s name, address, and telephone number pertaining to medical debts in a credit report.24

Users vary in how they evaluate credit reporting information. For users who view reports for employment purposes, the NCRAs provide a modified credit report, which removes birth date and other information that is sensitive in the employment context and does not include credit scores. Financial services users rely on credit reports as well as proprietary or third-party algorithms – “scoring” models – to interpret the information in a credit report. These algorithms use variables or “attributes” derived from the credit report.

2.4 Credit Scoring The NCRAs deliver credit reporting information to users in standardized electronic formats so that lenders’ underwriting systems can use reports from more than one bureau interchangeably and so that analytical credit risk models used by the lenders can identify and retrieve relevant pieces of information. 

More often than not, a credit bureau will also deliver a credit score calculated from the information in a credit report along with variables derived from the credit report (often called attributes). 

25 The lender will pay the bureau a fee for the credit report information and an additional amount for the score. The model used to generate the credit score is selected by the lender as the user. Lenders use credit scoring systems to assess the relative risk of consumers going delinquent on a loan. For most credit scoring models in use today, the higher the numerical value of a credit score, the lower the credit risk of a consumer. Consumers with very high scores thus are likely to get more favorable interest rates and other more favorable loan terms. In contrast, consumers with lower numerical scores present higher risks of default and may only be able to get loans at higher interest rates or other less favorable terms, if lenders are willing to lend to them at all. 

Large national lenders have widely used credit scoring since the 1970s to inform their loan underwriting.26 The NCRAs did not start providing credit scores based on credit bureau data until the late 1980s. In the late 1980s, one bureau built a bankruptcy prediction model. Models supplied by Fair Isaac Corporation (FICO) for use with credit bureau data appeared in 1990 and 1991. Today, scores using models supplied by FICO account for a substantial majority of third-party generic credit scores purchased with credit reports by financial institutions for loan origination decisions.27 In 2006 the NCRAs formed a joint venture, VantageScore, which offers competing scoring solutions. Additionally, the NCRAs and other third-party development companies develop both generic and custom scoring models. Many lenders also develop and use proprietary scoring models derived from credit report information. 

The most common credit scores rank the relative probability that a consumer will become 90 days delinquent on a new loan within two years. There are a wide variety of credit scores offered by the NCRAs that vary by score provider, by model, and by target industry.28 FICO, alone, has 49 different scoring models.29 Regardless of the version, credit scoring models tend to share common “attributes” derived from credit reports, such as a consumer’s bill paying history (e.g., on time, delinquent, in collections), the number and type of credit accounts a consumer has (e.g., bank cards, retail credit cards, installment loans), the amount of available credit that a consumer is using, how long a consumer has had a credit account, and recent credit activity, including inquiries.

Creditors use credit scores to enhance the efficiency and consistency of credit decisioning.30 Credit scores may also reduce the possibility of subjective decision making by lenders based on impermissible factors under fair lending laws such as the Equal Credit Opportunity Act (ECOA), like marital status, age or national origin. The Federal Reserve noted in its 2007 study on credit scoring, “By providing a low-cost, accurate, and standardized metric of credit risk for a pool of loans, credit scoring has broadened creditors’ access to capital markets, reduced funding costs, and strengthened public and private scrutiny of lending activities.”31 Some have argued that credit scores derived from credit reports have the potential to reinforce the effects of discrimination. They argue that where lending discrimination occurs, minority and other disadvantaged borrowers can wind up in credit products that make default more likely.

 As a result of higher default rates, their credit reports and scores depict them as bad credit risks, when in fact they would have performed better if they were in better, less expensive products.32 NCRAs can deliver credit reports and scores (using proprietary or third-party models) to those authorized to access a credit report instantly upon request. 

This makes it possible for lenders to grant instant credit in venues where obtaining credit is often an important part of a consumer’s purchase decision, such as at an auto dealer or a department store. Additionally, incorporating the use of credit scores as a factor in underwriting has enabled the government-sponsored entities, Fannie Mae and Freddie Mac, to introduce automated underwriting systems that allowed mortgage originators to streamline the mortgage underwriting process and provide rapid mortgage approvals. 

Because credit scores are derived from the information in credit reports, inaccuracies in credit report information can affect consumers’ credit scores. Some inaccuracies matter more than others. An error in a consumer’s address, the misspelling of a maiden name, or other errors in the consumer’s identification information are generally unlikely to have an impact on a consumer’s credit score or perceived credit worthiness by lenders. However, 

a public record that inaccurately indicates a consumer is subject to a tax lien, or a trade line that incorrectly states a consumer had a severe delinquency, could cause a lender to deny credit to a consumer altogether, or to treat a consumer it would otherwise consider eligible for a loan at prime interest rates as only eligible for sub-prime rates, costing the consumer thousands of dollars in interest.

 Below is a table showing how credit scores may be affected when specific adverse information appears in a credit report using different starting scores from VantageScore and FICO, two credit score providers. FICO scores generally have a range of 300 to 850, while Vantage scores range from 501 to 990. It is worth noting that these score impacts are hypothetical, 

and that the impact of an adverse event in any individual’s case varies by the unique characteristics of that consumer’s credit history, including the number and timing of such events.