Credit report accuracy and access to credit

Federal Reserve Bulletin, Summer, 2004 by Robert B. Avery, Paul S. Calem, Glenn B. Canner

Information that credit-reporting agencies maintain on consumers' credit-related experiences plays a central role in U.S. credit markets. Creditors consider such data a primary factor when they monitor the credit circumstances of current customers and evaluate the creditworthiness of prospective borrowers. Analysts widely agree that the data enable domestic consumer credit markets to function more efficiently and at lower cost than would otherwise be possible.

Despite the great benefits of the current system, however, some analysts have raised concerns about the accuracy, completeness, timeliness, and consistency of consumer credit records and about the effects of data limitations on the availability and cost of credit. These concerns have grown as creditors have begun to rely more on "credit history scores" (statistical characterizations of an individual's creditworthiness based exclusively on credit record information) and less on labor-intensive reviews of the detailed information in credit reports. Moreover, decisionmakers in areas unrelated to consumer credit, including employment screening and underwriting of property and casualty insurance, increasingly depend on credit records, as studies have shown that such records have predictive value.

A previous article in this publication examined in detail the credit records of a large, nationally representative sample of individuals as of June 30, 1999. (1) That analysis revealed the breadth and depth of the information in credit records. It also found, however, that key aspects of the data may be ambiguous, duplicative, or incomplete and that such limitations have the potential to harm or to benefit consumers.

Although the earlier analysis contributed to the debate about the quality of the information in credit records, it did not attempt to quantify the effects of data limitations on consumers' access to credit. To date, publicly available information about the extent of data quality problems has been limited, as has research on the effects of those problems. (2) The lack of information has inhibited discussion of the problems and of the appropriate ways to address them.

The main reason for the lack of information is that conducting research on the effects of data limitations on access to credit is complicated. Two factors account for the complexity. First, the effects vary depending on the overall composition of the affected individual's credit record. For example, a minor error in a credit record is likely to have little or no effect on access to credit for an individual with many reported account histories, but the same error may have a significant effect on access to credit for someone with only a few reported account histories. Second, assessments of the effects of data limitations require detailed knowledge of the model used to evaluate an individual's credit history and of the credit-risk factors that compose the model. Because information about credit-scoring models and their factors is ordinarily proprietary, it is difficult to obtain.

In this article, we expand on the available research by presenting an analysis that tackles these complexities and quantifies the effects of credit record limitations on the access to credit. (3) The analysis considers the credit records of a nationally representative sample of individuals, drawn as of June 30, 2003, that incorporates improvements in the reporting system over the past few years and, consequently, better reflects today's circumstances. We examine the possible effects of data limitations on consumers by estimating the changes in consumers' credit history scores that would result from "correcting" data problems in their credit records. We also investigate whether different patterns emerge when individuals in the sample are grouped by strength of credit history (credit history score range), depth of credit history (number of credit accounts in a credit record), and selected demographic characteristics (age, relative income of census tract of residence, and percentage of minorities in census tract of residence). Such segmentation allows us to determine whether the effects of data limitations differ for various subgroups of the population.

CONSUMER CREDIT REPORTS

A consumer credit report is the organized presentation of information about an individual's credit record that a credit-reporting agency communicates to those requesting information about the credit history of an individual. It includes information on an individual's experiences with credit, leases, non-credit-related bills, collection agency actions, monetary-related public records, and inquiries about the individual's credit history. Credit reports, along with credit history scores derived from the records of credit-reporting agencies, have long been considered one of the primary factors in credit evaluations and loan pricing decisions. They are also widely used to select individuals to contact for prescreened credit solicitations. More recently, credit reports and credit history scores have often been used in identifying potential customers for property and casualty insurance and in underwriting and pricing such insurance. (4)