The Fair Credit Reporting Act (FCRA) is a federal law in the United States that regulates the use of consumer credit information by credit rating agencies. It is designed to protect consumers, while also giving them tools to control their own data.
The FCRA bill was passed by Congress in 1970 and has been in place since. The bill establishes certain rights for consumers and regulates the ways in which credit agencies can collect, access, use and share the credit files of individuals.
In this guide, we will cover the Fair Credit Reporting Act in detail, explaining what it is, how it works, and what effects it has on everyday Americans.
What does the Fair Credit Reporting Act do?
The FCRA aims to help consumers understand their credit profiles, the information they contain, and what they can do with that information. The act is designed to help protect everyday people, while also helping them understand the world of credit reporting. Some key regulations set out by the FCRA include:
- Gives consumers the right to be notified if they are denied an application (credit, loan, insurance, or employment) based on their credit profile
- Establishes the right to request a full free credit report once per 12 months. Credit reports can be accessed at AnnualCreditReport.com
- Restricts access to credit reports, only allowing those with “permissible purposes”. The only organizations or individuals that can access credit reports are landlords, banks, insurance companies, and in some cases, employers
- Establishes the right for consumers to dispute inaccurate information on their credit reports
- Establishes the right for consumers to ask for a numerical credit score
- Allows individuals to opt-out of prescreened credit offers
- Enables individuals to “freeze” their credit, which helps to fight identity theft and unauthorized credit applications
- Establishes the requirement for negative information to be removed after a certain time frame. Most negative marks (late payments, collections, etc.) must be removed after 7 years, while bankruptcies are removed after 10 years
- Establishes the right for consumers to sue for damages if a party violates the terms of the FCRA
- If credit is pulled for employment purposes, the employer must obtain written permission from the applicant first
- Establishes various additional rights for a victim of identity theft and fraud
The rules of the FCRA apply to all types of financial institutions, from nationwide credit issuers to small savings associations and credit unions. The rules also apply to individuals who may have a need to pull credit reports, such as landlords.
Though there are many regulations, the highlighted points above are the most relevant to individuals. Much of the FCRA language is complex and intended for credit bureaus and financial institutions. But for the most part, all the typical consumer needs to know is that this act establishes rules for creditors that are designed to protect consumers.
What information do credit reports contain?
The FCRA regulates the type of data that can be collected in credit profiles, as well as how it’s used. An individual’s credit report contains a lot of information, including:
- Bill payment history (credit cards, loans, etc.)
- Past loan history
- Current loans and credit cards
- Employment data
- Current and past addresses, phone number, and other personal information
- Arrest records
- Bankruptcy information
- Child support information
Consumers should ensure that all the data in their credit reports are accurate. Again, you can request a full credit report once per 12 months at AnnualCreditReport.com. Currently, during the Covid-19 pandemic, Experian, Equifax, and TransUnion are actually offering free weekly credit reports to help consumers stay on top of their credit. This can be handled through AnnualCreditReport.com, or directly from Experian, Equifax, and TransUnion.
Keep in mind that each of these firms compiles their own reports. Although the information should be the same for each report, this is not necessarily the case. It’s wise to request reports from each agency every so often, to ensure that everything has been accurately reported.
Who enforces the Fair Credit Reporting Act requirements?
The FCRA is established law, laid out in detail in the United States Code (U.S.C.) Title 15, Section 1681. The Act lays out many regulations and requirements that involve the responsible use of credit by companies, banks, lenders, and landlords. The two federal agencies tasked with actually enforcing the regulations of the Act are the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB).
The CFPB, in particular, is a very helpful resource for individuals navigating the world of finance and credit. The CFPB is a US government agency tasked with making sure lenders and financial institutions treat consumers fairly. They have an extensive database of beginner-friendly information, as well as great consumer tools and resources to help navigate financial topics.
The Consumer Financial Protection Bureau is also the agency tasked with handling direct complaints from consumers. If you have a dispute or complaint related to a credit reporting agency, creditor, or financial product company, you can file a complaint with the CFPB.
Who uses credit data?
Consumer information and credit profiles are accessed and used by banks, lenders, landlords, insurers, and in some cases, employers or potential employers (this depends on state law – not all states allow employers to pull credit information). Anyone pulling your credit profile must have a valid need to do so, as laid out by the FCRA regulations. Any individual or company pulling your credit information will need your social security number, name, address, and additional information.
There are three main credit bureaus: Experian, TransUnion, and Equifax. These three firms essentially compile consumer credit data, making it available in report format to various companies and lenders. These credit reporting agencies produce the credit reports that banks will access, and also calculate estimated FICO scores for individuals. The bureaus may also issue fraud alerts, and have various tools to help protect consumers from identity theft.
In most cases, it is these three bureaus that are the consumer-facing arm of credit. This means to freeze your credit report, you’ll need to contact these companies (likely all three). Additionally, handling credit disputes will generally also be conducted through Experian, Equifax, or TransUnion.
Consumer reporting agencies and companies also use credit data. A full list of licensed consumer report companies can be found here.
When a bank, credit union, insurer, or employer wishes to pull a credit report, they will use either Experian, Equifax, or TransUnion. One bank may use Experian, while another may use TransUnion. For this reason, it’s important for consumers to ensure the accuracy of their credit profiles with each rating agency, as the information can sometimes differ.
How your credit affects your life
One of the main focuses of the Fair Credit Reporting Act is to help consumers understand how their credit information is used. One might wonder, why is this important? How does credit affect our day-to-day lives?
Your credit score and detailed credit report are more important than you might think.
Credit profiles and scores are accessed by banks, lenders, credit card issuers, landlords, and even employers in some situations. The data in these reports can be used to gauge creditworthiness (determine whether the individual is worthy of a loan), or even an apartment lease.
The obvious example of using credit is applying for a loan. Credit scores affect not only your likelihood of getting approved for a loan but also the interest rate (APR) that you will receive.
The results of the use of credit scoring can be extreme – particularly in regards to mortgages. A good credit score could be the difference between getting approved for a mortgage and moving into your dream home, or getting denied and being unable to make the leap to homeownership. Even if you are approved for a mortgage, the interest rate variables can have huge effects on your long-term housing costs.
In all, your credit score can affect:
- Your ability to get approved for a loan or mortgage
- The interest rate you will pay on loans
- Your ability to get approved for a credit card
- The APR you will receive on credit cards
- Your ability to get approved for a residential lease
- Your ability to get hired (in some states)
- Your ability to get insurance plans, and the rates you may pay for insurance
- Much more
Because a negative mark on your credit report can cause an adverse action by potential lenders, landlords, and more, it’s very important that you stay on top of your credit and even repair your credit if needed.
Requesting a free annual report every year is a great place to start. The FCRA does establish the rules, and protects consumers in many ways – but ultimately, it’s up to you to ensure that your credit information is accurate. Once you have a handle on your credit, you can also take steps to improve it.