An overview of consumer data and credit reporting

Federal Reserve Bulletin, Feb, 2003 by Robert B. Avery, Paul S. Calem, Glenn B. Canner

Credit reporting companies use various techniques to process the high volume of information they receive. When a credit reporting company receives data from a creditor, government agency, or third-party provider, it first assesses its accuracy. If the data are found to contain errors, they are returned to the reporting entity for resubmission with the necessary corrections. Otherwise, the credit reporting companies compile and reconfigure the newly received data to create or update the record of an individual's credit experiences. This reconfiguration can require a high level of technical sophistication. For example, credit reporting companies have had to develop rules for deciding when to ignore slight variations in personal identifying information and techniques for recognizing that data items with the same identifying information, such as name, may actually be associated with different individuals.

Although credit reporting company data are extensive, they are not complete. First, information on some credit accounts held by individuals is not reported. Some small retail, mortgage, and finance companies and some government agencies do not report to the credit reporting companies. Loans extended by individuals, employers, insurance companies, and foreign entities typically are not reported. Second, complete information is not always provided for each account reported. Sometimes creditors do not report or update information on the credit accounts of borrowers who consistently make their required payments as scheduled. Credit limits established on revolving accounts are sometimes not reported. Also, creditors may not notify the credit reporting company when an account is closed or undergoes other material changes.

The information reported on credit accounts reflects each account's payment status and outstanding balance shortly before it is forwarded to the credit reporting company. Thus, the report is sensitive to the date on which the information is forwarded. For example, a credit account reported to the credit reporting companies on the day after a payment is made and posted to the account will show a smaller balance than one reported to the companies on the day before the payment.

Although credit reporting companies endeavor to maintain high-quality data, the degree to which consumer credit reports are accurate, complete, or consistent across companies is in dispute. A recent study, for example, found evidence of inconsistencies in the information included in individual credit reports across the national credit reporting companies. (7) An earlier investigation by a consumer organization suggests that as many as one-third of all consumer credit reports may contain errors that could result in the denial of access to credit. (8) A study by Arthur Andersen & Company argues, however, that such errors may not have material significance regarding access to credit. The Andersen study concluded that only a small proportion of individuals were denied credit on the basis of inaccurate information in their credit reports. (9)