The Fair Credit Reporting Act (FCRA) is a federal law that helps to ensure the accuracy, fairness and privacy of the information in consumer credit bureau files. The law regulates the way credit reporting agencies can collect, access, use and share the data they collect in your consumer reports.
What Is the Purpose of the Fair Credit Reporting Act?
Passed in 1970, the FCRA helps consumers understand what actions they can take in regard to the information in their credit reports. Information is being gathered about consumers all the time: In addition to the three major consumer credit bureaus (Experian, TransUnion and Equifax), there are other organizations that may collect and use your information. For example, banks and credit unions may use information from your credit history to determine whether to approve you for a loan.
Whenever you apply for a credit card, a car loan, a mortgage loan or any other form of credit, the issuing company checks your credit history to assess your creditworthiness. The terms you are offered for credit (such as a loan) may be based in part on your credit score and information in your credit report.
Your credit history affects more than just your ability to get loans or the annual percentage rate (APR) on your credit cards. For instance, prospective landlords could check your credit report to see how creditworthy you are when deciding whether they can trust you to pay your rent on time.
In some states, employers may check your credit report for hiring purposes. Also, depending on the state, insurance companies may check your credit to determine whether to offer you coverage.
The FCRA helps protect you by regulating how information in your consumer report can be used and accessed. Here's an overview of the key aspects of the law.
The FCRA gives you the right to be told if information in your credit file is used against you to deny your application for credit, employment or insurance.
The FCRA also gives you the right to request and access all the information a consumer reporting agency has about you (this is called "file disclosure"). You can get one free file disclosure every 12 months from each national credit bureau by going to AnnualCreditReport.com.
The FCRA gives you access to your credit report but restricts others' access. In general, access is limited to people with a "permissible purpose," such as landlords, creditors and insurance companies. If an employer wants to see your credit report, you must give written consent; employers must meet other requirements as well, and not all states allow employers to pull credit reports as part of an applicant's background check.
If you find what you believe to be inaccurate or incomplete information on your credit report, you have the right to dispute it. The credit bureau will then contact the data furnisher to confirm whether the information is correct. If it's not, the credit bureau will either correct it or remove it within a certain time period. Accurate negative information, such as bankruptcies and late payments, will be removed after a certain time period.
The FCRA gives you the option to opt out of the pre-screened offers of credit you receive.
Finally, the FCRA gives you the ability to put a security freeze on your credit report, which ensures that potential lenders cannot check your credit report without you first lifting the freeze or providing the specific lender with a one-time PIN to access your credit report.
See a more detailed summary of the FCRA below or visit consumerfinance.gov/learnmore/ for more information. Keep in mind that in addition to the FCRA laws, some states have their own laws regulating consumer credit reporting; you'll find that information below under "Notification of Rights."
The Five Factors of your credit score
Your credit score is based on the following five factors:
Your payment history accounts for 35% of your score. This shows whether you make payments on time, how often you miss payments, how many days past the due date you pay your bills, and how recently payments have been missed. Payments made over 30 days late will typically be reported by your lender and lower your credit scores. How far behind you are on a bill payment, the number of accounts that show late payments and whether you've brought the accounts current are all factors. The higher your number of on-time payments, the higher your score will be. Every time you miss a payment, you negatively impact your score.
How much you owe on loans and credit cards makes up 30% of your score. This is based on the entire amount you owe, the number and types of accounts you have, and the amount of money owed compared to how much credit you have available. High balances and maxed-out credit cards will lower your credit score, but smaller balances may raise it – if you pay on time. New loans with little payment history may drop your score temporarily, but loans that are closer to being paid off may increase it because they show a successful payment history.
The length of your credit history accounts for 15% of your score. The longer your history of making timely payments, the higher your score will be. Credit scoring models generally look at the average age of your credit when factoring in credit history. This is why you might consider keeping your accounts open and active. It may seem wise to avoid applying for credit and carrying debt, but it may actually hurt your score if lenders have no credit history to review.
The types of accounts you have make up 10% of your score. Having a mix of accounts, including installment loans, home loans, and retail and credit cards may help improve your score.
Recent credit activity makes up the final 10%. If you’ve opened a lot of accounts recently or applied to open accounts, it may suggest potential financial trouble and may lower your score. Credit scoring models are also built to recognize that recent loan activity does not mean a consumer is necessarily risky.