Credit scores and credit reports are important financial tools for all American consumers. For example, your credit score will affect what loans you qualify for and whether you can take out a mortgage to purchase a house.
Because of the importance of credit scores, creditors and lenders must abide by the regulations laid out in the Fair Credit Reporting Act. Read on to discover more about the purpose of the FCRA and how it protects American consumers like you.
Put simply, the FCRA is a 1970 legislative rule set that both assists consumers in understanding their rights and options regarding credit information and outlines rules and restrictions that creditors and credit bureaus must abide by.
These rules and restrictions are highly important. The three major credit bureaus, including TransUnion, Experian, and Equifax, as well as other credit reporting agencies, collect and organize consumer credit information all the time. Credit information is any financial activity that can indicate a person's creditworthiness or financial responsibility, like payment history, open lines of credit, etc.
Banks, credit unions, lenders, and other creditors might use credit history or other information to determine whether to approve consumers for loans or to approve consumers for other financial activities.
The FCRA ensures that:
Think of the FCRA as an important piece of legislation that acts as an overall guideline for the credit industry. Without it, credit bureaus might have much more power over American financial activities and health, and creditors could discriminate against consumers more easily.
The Fair Credit Reporting Act is largely a safeguard to help consumers better understand credit information and the rights they have in relation to it.
Prior to the FCRA’s adoption in 1970, many consumers did not fully understand what credit information was, who could gain access to credit information, and what rights they had if a credit bureau had inaccurate credit information. This led many people to have lower credit scores than they should have had, limiting their financial possibilities and loan options.
The FCRA changed all that. The FCRA’s purpose is to:
The FCRA is a strong regulatory piece of legislation that ensures fairness in the financial sector much more strictly. Without the FCRA, credit would not be as reliable a type of information for lenders and borrowers alike.
The FCRA provides several direct benefits to consumers in particular, as it's primarily focused on protecting consumers from unfair credit practices.
First and foremost, the Fair Credit Reporting Act ensures and enshrines certain financial rights for all American consumers. These include:
This information is usually given in an adverse action letter, which is handed to consumers after they are denied for one financial option or another. An adverse action letter has to be specific about what element of a consumer's credit history caused them to be denied, like credit score, previous bankruptcies, etc.
This process is called file disclosure. Consumers are legally entitled to one free credit report every 12 months from each of the national credit bureaus mentioned above. They can also pay for additional credit reports
For instance, if a customer finds that a utility company continues to report their bill as due, despite having previously paid it off, the customer has the right to dispute that information and get it corrected at the earliest opportunity
Security freezes prevent potential lenders from checking credit reports without the consumer lifting the freeze or providing a prospective lender with a one-time PIN to access the credit information
The FCRA also provides benefits to consumers by ensuring that they will always have access to their credit info. This is part of the above-mentioned right to access one free credit report from each of the big bureaus once every 12 months. Consumers can also track their credit scores as they evolve or change with financial behavior or spending habits.
Furthermore, the FCRA benefits consumers by restricting access to credit information in some circumstances. Specifically, creditors may only request a consumer’s credit information if:
A permissible purpose under the FCRA is a legitimate reason for needing one’s credit info. For example, a lender might need a consumer’s credit score before deciding whether to underwrite a loan for them. Thus, they are legally allowed to request credit information from one of the credit bureaus.
But a landlord is not legally allowed to request a tenant’s credit score for no good reason, like curiosity, especially after they have already allowed the tenant to sign a lease.
By protecting credit information access, the FCRA ensures that consumers don’t have to worry about their credit scores constantly decreasing due to ongoing hard credit checks (which can decrease a credit score by a few points each time). This also prevents lenders, banks, and other institutions from discriminating against consumers before knowing about their credit information, limiting the possibility of discrimination on other bases, like race, religion, and more.
In addition to the above benefits to consumers, creditors technically benefit from the FCRA as well.
In any complex industry, the more straightforward and practical rules are, the easier it is for organizations to avoid getting in legal trouble. Since the FCRA includes a lot of rules and regulations about how consumer information can be collected, distributed, and utilized, creditors and credit bureaus benefit from the FCRA as they know exactly how to behave to avoid fines and lawsuits.
For instance, consumer credit information can only be requested for permissible purposes. By the same token, credit bureaus can only hand out credit information about their consumers if they know it’s for a permissible purpose.
Due to this guideline, credit bureaus (theoretically) never need to worry about giving out credit information improperly or illegally by accident, though this does still occur from time to time.
The purpose of the Fair Credit Reporting Act is to protect consumers from illegal or unfair credit collection and use practices, as well as to outline consumer credit regulations and rights. The FCRA ensures that you can dispute inaccurate or out-of-date credit information, plus gives you the right to pursue legal action if creditors or credit agencies don't update your information accordingly.