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When a consumer makes any move to borrow money, that transaction is recorded by the credit bureaus, the three most well-known of which are Experian, Equifax, and TransUnion. These publicly listed, for-profit companies collect information on a consumer’s financial history down to the monthly balances on their credit card. This information is used to calculate the consumer’s credit scores. Both the reports and the scores are used to determine the terms of any financial milestones that consumers may reach, from renting an apartment to buying a home.
This entire process happens regardless of how the consumer feels about it. However, the powers that be are reined in by the Fair Credit Reporting Act (FCRA), which lays out rules that the credit bureaus have to follow and rights that their consumers are entitled to. These rules include the type of information the bureaus are allowed to collect and who they can sell it to.
Here’s everything you need to know.
The Fair Credit Reporting Act is a federal law that regulates credit bureaus and protects consumers. It was passed in 1970 to address the accuracy, fairness, and privacy issues within the credit industry, given its significance in people’s lives.
The Federal Trade Commission (FTC) was the sole enforcer of the FCRA until the Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB), which formerly began operations in 2011. The two government agencies now share responsibility for enforcing the FCRA.
The rules that the FCRA establishes cover how a consumer’s credit information is collected, how long it is kept, and how it is shared with others from potential employers, landlords, and even the consumers themselves. The FCRA also establishes measures to protect consumers from identity theft.
The FCRA dictates who can see a credit report and under what circumstances. Certain organizations must have what is called a “permissible purpose” for a credit bureau to grant them access to your credit report. Permissible purpose usually covers credit, insurance, rental applications, or employment. For example, potential lenders may request a credit report when someone applies for a line of credit. An employer can request an applicant’s credit report, but only with the applicant’s permission.
Consumers have designated rights under the FCRA. You, the consumer, do not have the right to opt-out of credit reporting, but you do have the right to make sure that the recorded information is correct. By law, you are entitled to one free credit report every year from each of the three major credit bureaus, though until the end of 2023, you can access weekly free credit reports. Under the FCRA, consumers also have a right to:
If a consumer files a request to the credit bureau and the credit bureau fails to respond, the consumer can file a complaint with the CFPB.
An example of how the FCRA works
A consumer decides to purchase a home and applies for a mortgage and the bank denies their application, stating that their decision was based on their credit score. Under the FCRA, the creditor must notify the consumer of the rejection, which is called an adverse action notice, within a reasonable time. The notice needs to include which credit bureau provided the information to the lender along with the contact information for this bureau.
If the bank pulled their report from Experian, the consumer can now request a copy of their Experian credit report to see if the information contained therein supports the lender’s decision.
The FCRA requires that a lender, employer, landlord, or anyone else seeking a consumer’s credit report have a legally permissible reason for doing so. The FCRA also requires that credit reporting agencies must remove negative credit information after seven years and bankruptcies (depending on what type) after 10 years. If this negative information is still on your credit reports after they’ve reached those time periods, you can dispute these items.
If a credit bureau breaks a rule outlined in the FCRA, it can hurt your credit scores and have a serious, negative impact on your financial life. Being able to access credit and money when you need it is crucial and that is largely determined by what is in your credit report.
Credit can play a role in every aspect of your life and the higher the credit score the better. Protecting your credit and knowing your rights as it pertains to credit reporting is important.
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