Academic journal article Financial Services Review

Credit Usage, Payment Behavior, and the Accuracy of Consumer Credit Files

Academic journal article Financial Services Review

Credit Usage, Payment Behavior, and the Accuracy of Consumer Credit Files

Article excerpt


The credit-driven consumer economy in the United States is supported by a reporting and regulatory system that involves multiple parties. In addition to the seller and the buyer of property, goods, or services, third parties are typically engaged in financing the transaction, servicing the loan, collecting debt, and disseminating related information. To support this system, the three major credit bureaus in the United States (Equifax, Experian, and TransUnion) maintain credit histories on approximately 200 million consumers and process nearly two billion items of information each month (Avery, Calem, Canner, and Bostic, 2003) from data furnishers (credit card companies, mortgage servicers, debt collectors, etc.). The result is a set of extremely comprehensive files that reveal the ways that U.S. consumers use credit and meet their financial obligations.

Credit scores based on this information are used to facilitate decisions in lending and other financial transactions. Accurate credit-bureau data can help in properly assessing credit risk and commensurately pricing credit, but individuals with errors in their credit files can suffer unreasonable denials of credit, inflated borrowing costs, higher cost for insurance, inability to rent a home or even denial of employment. In short, credit-bureau records provide what appears to be microscopic historic detail on individuals' use and management of credit. Credit scores determined from the credit-bureau data can greatly affect individuals' future economic and personal experience. Systems for collecting, maintaining, verifying, correcting, and disseminating data are, therefore, subject to constant scrutiny.

The Fair Credit Reporting Act (FCRA 1970) established regulatory guidelines and a legal framework for the credit-reporting industry in the United States. It was amended in 1996 to include processes designed to improve accuracy of data and to designate responsibilities of the credit bureaus and data furnishers when confronted with consumer claims that their data are inaccurate. In 2003, the Fair and Accurate Credit Transactions ("FACT"; Fair and Accurate Credit Transactions Act, 2003) Act imposed further reinvestigation duties on data furnishers.1 Staten and Cate (2004) describe the FCRA and its subsequent amendments as taking the "remedial approach" to regulation, whereby the regulating authority "... designates the consumer as the 'quality-control' inspector... and places the responsibility for monitoring file accuracy on the party who can determine accuracy at the lowest cost." Unfortunately, it is not evident that most consumers review their credit files and take actions to get errors corrected. Lyons, Rachlis, and Scherpf (2007) report that many consumers ". . . still lack specific knowledge about what information is contained in credit reports, how to dispute errors, and the possible impact of their credit history on such factors as insurance premiums and employment."

In 2012, a national consumer poll for the National Foundation for Credit Counseling (NFCC 2012) found that just 38% of respondents had reviewed their credit reports within the previous 12 months despite the fact that the Federal Trade Commission (FTC) publicizes the annual availability of free credit reports from the Web site https://www.annualcreditreport. com. An understanding of consumer use of credit and the effects of industry and regulatory practice on individual consumers is important, as imposition of regulations to protect consumers can be very costly and have disproportionate effects on small financial institutions (Elliehausen and Lowrey, 2000).

Consumer advocates have raised concerns that some sectors of society may be disadvantaged in the gathering and reporting of consumer credit information. From a survey of 154 adults, the United States Public Interest Research Group (USPIRG) concluded that "79% of the credit reports surveyed contained either serious errors or other mistakes" and one-fourth of the reports "contained serious errors that could result in the denial of credit" (National Association of State PIRGs, 2004). …

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