An overview of consumer data and credit reporting

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

Status at most-recent report. About 5 percent of all accounts were reported as having payment problems at the time of the most-recent reporting; most of the accounts with payment problems were reported as having a major derogatory. The incidence of accounts exhibiting a major derogatory at last report differs from that of accounts that ever exhibited a major derogatory because more than half the accounts with a historic major derogatory had been closed and showed a zero balance.

Interpreting the Credit Account Data

As the preceding discussion highlights, credit reporting company data provide a wide-ranging and comprehensive picture of accounts that reflects individuals' experiences with credit. However, the discussion also reveals that, in some instances, the data are not sufficiently up-to-date or complete to permit a clear understanding of an account's current status. The following sections' present a more detailed look at the information in the credit reporting company files, focusing on items most pertinent to credit evaluation. (16)

Credit evaluators rely on a number of factors in assessing the-credit quality of individuals. The exact weight attached to specific factors varies across evaluators and their different models, but the factors generally fall in three broad areas: the level of a consumer's indebtedness, the payment history, and credit account characteristics. (17)

Level of Consumer Indebtedness

When evaluating credit, creditors consider the type and amount of debt a consumer has and the proportion of available credit he or she has in use (credit utilization). For revolving accounts, credit utilization is measured as the proportion of available credit in use (outstanding balance divided by credit limit). For mortgage and installment accounts, credit utilization is generally measured as the proportion of the original loan amount that is unpaid, referred to here as the paydown rate.

Fundamental to measuring consumer indebtedness is deciding which accounts to treat as active--that is, installment and mortgage accounts with positive balances and revolving accounts upon which consumers can draw. Clearly, credit evaluators would include currently reported open accounts as active in any calculations. The difficulty, however, is in determining how to treat accounts that are in the dormant and unknown categories. The dormant category likely includes many accounts that are not currently reported but can be further drawn upon by the consumer. For example, some creditors do not provide updates for accounts that have a zero balance and no recent activity. The unknown category also likely includes some accounts that are still active.

For the present analysis of consumer indebtedness, the definition of "active" includes currently reported open accounts as well as dormant revolving accounts that were last reported within the year before the date the sample was drawn. Discussions with industry professionals, however, indicate that there is no strict role regarding a single appropriate choice of time period cutoff. The choice of the cutoff affects the number of accounts deemed to be active and the potential borrowing capacity of an individual but has no bearing on the amounts owed because all the dormant accounts had zero balances at the time of last report. For reasons discussed below, this study includes no accounts from the unknown category, which are believed most likely to be closed.