Credit Reporting: A Primer for Policymakers
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Your credit report may determine the interest rate on a loan, whether a person can rent an apartment and, in some instances, whether an individual will be hired for a job. What number purports to tell financial institutions, credit card companies, car dealerships and mortgage lenders, among others, the credit risk of consumers? This number is a consumer’s credit score, and the number is based on an individual’s credit report. This number can have a great deal of power. This report explains what a credit score is, how it is calculated, what information is contained in a credit report, and who collects it.
These questions are frequently posed by consumers and, according to some studies, may not be asked often enough. In March 2005, the U.S. Government Accountability Office conducted a survey to assess consumers’ awareness of the credit reporting process. It found that most consumers understand the basics of credit reporting and had even seen their credit reports.1 The survey revealed that, “Consumers generally understood credit reports and had viewed their reports but that many lacked specific knowledge about what their credit reports contained, how they were used, and other potential impacts of their credit history.”2 However, a September 2005 survey conducted by the Consumer Federation of America (CFA) and Providian Financial showed that consumers’ understanding of and access to credit scores has improved over time, but still was insufficient.3 According to CFA Executive Director Stephen Brobeck, “Unfortunately, most consumers still do not know basic facts about credit scores and their financial significance.”4 In this survey, only 27 percent understood that credit scores measure credit risk, and not the consumer’s credit knowledge, amount or attitude.