The Misconception of the Consumer as a Homo Economicus: A Behavioral-Economic Approach to Consumer Protection in the Credit-Reporting System

By Osovsky, Adi | Suffolk University Law Review, Summer 2013 | Go to article overview

The Misconception of the Consumer as a Homo Economicus: A Behavioral-Economic Approach to Consumer Protection in the Credit-Reporting System


Osovsky, Adi, Suffolk University Law Review


IV. THE IMPLICATIONS OF CONSUMERS' IRRATIONALITY IN THE CREDIT-REPORTING SYSTEM

A. Unawareness of Rights Under the FCRA

In 1979, the Credit Research Center at Purdue University conducted a survey of California bank cardholders to assess their understanding of the function of CRAs. Only 37% correctly identified CRAs as record-keeping agencies and the study concluded that consumers' knowledge of CRAs was quite limited. (185)

Since then, consumers' literacy has only slightly improved. In a national survey in 2005, the United States Government Accountability Office (GAO) found that consumers understood the basics of credit reporting and the dispute process, but not much more. (186) For example, many consumers did not know how long items remained on their credit reports or the impact their credit history could have on insurance rates and potential employment. (187)

In 2008, a survey commissioned by the Consumer Federation of America and Washington Mutual Bank found that consumers still have a poor understanding of credit scores, although their knowledge has slightly improved over the years. (188) For instance, "[l]ess than one-third of Americans (31%) ... understand that credit scores indicate risk of not repaying a loan, rather than factors like knowledge of, or attitude toward, consumer credit." (189) In addition, "[m]any Americans fail to understand that one's credit score reflects only how [he or she] use[s] credit, not factors such as income and age." (190)

The problem of financial illiteracy is enhanced by consumers' unawareness of basic rights associated with the credit-reporting system, as discussed in more detail below.

1. Unawareness of the Right To Receive a Free Credit Report

According to the GAO survey, less than half of consumers (47%) know that the new law entitles all consumers to request one free credit report per year. (191) The survey also showed that only "58 percent of consumers had seen their credit reports at some point in time and that 45 percent of this group had viewed them within the last year." (192) Of the 58 percent who said they had viewed their reports, "the largest percentage [48 percent] said that they had seen their reports because they were making a large purchase, such as a car or home, or were refinancing." (193)

Such data shows that most consumers do not fulfill the monitoring task that the law has entrusted to them. This should not come as a surprise in light of the fact that most consumers are not even aware of their right to receive a free credit report. Unawareness, however, is not the only cause for the lack of consumer inspection of credit reports; the status quo bias is an important contributor too. Thus, "[w]hile the majority of consumers (86 percent) [in the GAO survey] said that they should check their reports periodically, only 61 percent of this group reported actually having seen their credit reports." (194)

2. Unawareness of the Right To Dispute Errors for Free

The GAO survey found that consumers knew they had the right to dispute information on their credit reports, but only "about one-third of consumers correctly responded that CRAs would investigate disputed information for free." (195) In addition, the survey found that only a small percentage (18 percent) had actually disputed inaccuracies at some point. (196)

Unawareness and procrastination--results of the status quo bias--may explain these results, but another factor is the dispute process itself. It has been argued that the current dispute process does not involve real investigation. (197) Rather, it is an automatic procedure that discourages consumers from disputing errors. (198) In this process, the consumer's written dispute and any accompanying documents are reduced into a two- or three-digit code that the assigned agency employee believes best describes the dispute. (199) This code alone is sent to the furnisher by a computer message; the consumer's documents are not forwarded to the furnisher, and there is no human contact between the CRA and the furnisher. …

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