The Fair Credit Reporting Act was created by the federal government to protect you, the consumer, but also companies of various types. Although this law was enacted several years ago, and recently some changes were made whereby landlords must now adhere to stricter rules, many consumers have no idea what this law is, and for those who do, many questions arise. We wanted to take the opportunity to provide answers to some of the more commonly asked questions to help clarify exactly what the Fair Credit Reporting Act covers regarding the protection it provides.
What is this law?
To begin, the Fair Credit Reporting Act is a unique system used by financial institutions, credit card companies, other miscellaneous creditors, insurance companies, landlords, and employers to determine the creditworthiness and thereby trustworthiness of a consumer. In other words, all the businesses and organizations mentioned are allowed by law to pull your credit report from one or all three credit bureaus to look at information others have reported.
For example, looking at your credit report or reports, things such as your payment history, spending practices, any collection actions, outstanding debt, and the age of different accounts, employment history, and more would be available. To determine the way in which you perform as a consumer, a statistical program would compare your information to the credit performance of other consumers.
The credit scoring system used, with Fair Isaac Corporation or FICO being the most common, would use a mathematical formula to assign a three digit score, which becomes your credit score. Scores start at 300, which is exceptionally poor and goes up to 850, which is a perfect score. The better the score the easier it would be to get a loan, be approved for a credit card, be offered insurance at the lowest premium, or even get an offer for employment.
Why was the credit scoring system developed?
Businesses needed a reliable means of determining a consumer’s level of creditworthiness. For years, the only methods used were judgmental and subjective so as a way of treating all consumers equal while taking a systematic approach to identifying how well a consumer manages finances and credit, the Fair Isaac Corporation developed a credit scoring system based on a mathematical formula. Although other scoring systems exist, this one, called FICO is the most preferred.
How is the credit scoring system developed?
Again, more than one credit scoring system is used but FICO is the most common. For this and others, information received from creditors, as well as insurance companies, landlords, and employees is entered into the system. A mathematical formula takes this information and assigns it a score. This score then becomes the credit score that future inquiries would see and base creditworthiness on.
While things such as payment history, outstanding balance, available credit, age of accounts, employment, and other information are allowed to be used for the credit scoring to calculate a person’s credit score, under the Fair Credit Reporting Agency but some things are prohibited. For example, your age, marital status, race, gender, religion, and national origins cannot be used by any credit scoring system.
Is the credit scoring system reliable?
The purpose of the Fair Credit Reporting Act being developed in the first place was to make it possible for consumers and creditors to gain access to accurate and reliable information. For this reason, the credit scoring system must meet high standards to meet the mandates of this federal law. Overall, this type of system is very accurate and reliable, capable of generating credit scores for millions of consumers and with impartial rulings.
The way in which the credit scoring system is designed is to generate credit scores quickly but also accurately and most of the time, it accomplishes this goal. On rare occasion, mistakes can happen but with this being a type of software program risk is low. Even so, because mistakes can occur by reporting parties to the three credit bureaus and possibly with the credit scoring system itself, you should take full advantage of the free credit report from all three agencies you are entitled to each 12 months. That way, you can review information reported about your credit history and have corrections made if needed.
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