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What Is The Fair Credit Reporting Act (FCRA) And How Does It Protect Your Credit History?

7-Minute Read
Published on June 4, 2020

Before the ’70s, credit reporting was a patchwork and inefficient process. Different types of creditors each relied on different types of reports, which were put together by local credit reporting agencies that, in addition to reporting information provided to them by the lenders they worked with, pulled data from local newspaper notices such as arrests or marriage announcements.

If that seems weird, unfair and even discriminatory, you aren’t alone in your thinking. The federal government also recognized that this was a problem, especially as the use of credit became more ubiquitous, and set forth to make credit reporting fairer.

With the passing of the Fair Credit Reporting Act in 1970, consumers were given certain rights when it came to their credit histories.

What Is The FCRA And What Are Its Requirements?

The FCRA regulates the accuracy of consumer information and gives consumers the right to dispute any information they find inaccurate or incomplete. As amended by Fair and Accurate Credit Transactions Act , it also allows consumers free access to their credit histories.

The FCRA ensures that credit reporting agencies (i.e. the companies that create consumer credit reports) only include true, verifiable information in your report and that it is kept private and only given to entities that have a valid reason – and, in most cases, your permission – to view it.

The law also ensures that credit reporting is transparent for consumers and gives them the right to dispute inaccurate or incomplete information. If your rights under the FCRA are violated, you are able to sue for damages.

In 2003, the FCRA was expanded with FACTA to enhance the protections already provided by the FCRA as well as help consumers combat the increasing incidence of identity theft. This included giving individuals the right to a free copy of their credit report each year as well as the ability to place fraud alerts on their credit files.

Here are some of the most important rights you have that are protected under the FCRA, as outlined by the Federal Trade Commission:

  • The right to know if information in your credit report has been used to deny you credit
  • The right to know what is in your credit report
  • The right to know your credit score (though you may have to pay for it)
  • The right to dispute incomplete or inaccurate information
  • The right to have incomplete or inaccurate information removed or corrected
  • Outdated negative information must not be reported after a certain amount of time (typically 10 years for some bankruptcies and 7 years for other negative information)
  • Only certain entities are allowed to have access to your credit report
  • Employers must receive your written consent before a credit agency can give them your credit report
  • The right to opt out of unsolicited pre-screened credit or insurance offers
  • The right to freeze your credit or place a fraud alert on your credit file
  • The right to seek damages from those who have violated your rights under the FCRA

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How Does FCRA Protect Consumers?

If you’ve ever applied for a credit card or a loan, you might recall that the bank or lender you were working with first asked for your authorization before pulling your credit. This is the first step in the process that the FCRA regulates.

There are three main entities involved in the credit reporting process: the reporters, the collectors and the end users of credit information. The FCRA sets the standards for how these three bodies can interact, ensuring that the process is fair for all.

The FCRA And Reporters

You won’t have a credit history or score until you open your first credit account. This is the first stop in the credit reporting process: all of your previous creditors. Your credit report is made up of information that is provided by all the lenders, banks and companies you’ve received loans or lines of credit from.

When these credit reporters provide the credit reporting agencies with your history, the FCRA states that creditors must provide complete and accurate information to the credit agencies.

If you dispute what you believe to be inaccurate information, the reporter of that information must investigate that claim and report its findings to the relevant credit reporting agencies. However, you have to initiate this process with a written letter of dispute, usually to both the credit reporting agency and the company that reported the inaccurate information. This is why it’s so vital to regularly check your credit report for inaccuracies.

Reporters are also required to notify you in writing when negative information has been reported to a credit reporting agency.

To give an example of how all this plays out in practice, let’s say you’re a victim of identity theft. You’re looking over your credit report when you notice an account that you didn’t open. One of the first steps you’ll take, in addition to reporting the identity theft to the FTC and potentially your local police department, is contacting the creditor who reported the account to let them know the account was opened fraudulently.

Thanks to the rights provided to you by the FCRA, the creditor will work with you to get the account frozen or closed and remove information that was put on your credit report as a result of the fraud.

The FCRA And Credit Reporting Agencies

You’ve probably heard of the three leading credit reporting agencies – Equifax®, Experian™ and TransUnion® – but they aren’t the only companies that track individual consumer activity. For example, some of these consumer reporting entities collect information on checking accounts or apartment rental history.

When it comes to these specialty reporting agencies, you’re generally entitled to know what information they’re keeping on you, just as you are with the major credit reporting agencies. If you ever run into an issue due to a report an agency is keeping on you (such as being rejected for a checking account), you can contact that agency to receive a copy of the report.

Because fair and accurate consumer reporting is so vital, the FCRA requires that these agencies have reasonable procedures to ensure the accuracy of the information they report. They are also required to make that information available to consumers so they can dispute inaccurate information.

The FCRA also regulates how long derogatory information can remain on an individual’s credit report (no more than seven to 10 years, depending on the type).

Let’s continue with our identity theft example. Thanks to the FCRA, you’ll have protections with credit reporting agencies as well. In addition to working with you to correct the fraudulent information on your credit report, you have the ability to place a fraud alert on your credit file through these agencies.

To set up a fraud alert, you’ll simply contact any one of the three major credit reporting agencies – whichever one you tell must alert the other two. Fraud alerts are free and last for 1 year. During that year, anytime a creditor looks at your credit report in response to a request to open credit in your name, the fraud alert lets them know that they should take further steps to confirm your identity before extending any credit.

You don’t have to be a victim of identity theft to place a fraud alert on your credit report. If you believe you are at risk for fraud – for example, if your wallet was stolen or your data was exposed in a security breach – you might opt to place a fraud alert to be safe. Deployed servicemembers can also place active duty alerts on their files, which work similarly to fraud alerts.

You also have the right to place a security freeze on your file. A security freeze completely freezes your credit report so no new accounts can be opened in your name.   

The FCRA And Receivers Of Credit Information

So, your past creditors report your credit information to the credit reporting agencies, who then compile that information into your credit report. What is the point of all this? The point is so when a new creditor (or other entity) considers your application, they have some data to help them make their decision.

Who are these entities that receive your credit information?

Applying For Credit

This is the main function of your credit report – to help you in applying for credit. Those who receive your credit information for the purpose of qualifying you for credit can only use that information in certain ways, according to FCRA protections.

If information in your credit report is used against you, you have a right to know. For example, if your application for a credit card is denied, the credit card company must tell you why you were denied, and they must tell you which credit reporting company provided them the report on which your denial was based.

Applying For A Job

If you’ve ever had a prospective employer run a credit check on you before offering you a job, you know that banks and lenders aren’t the only entities interested in looking at your credit history.

According to Experian, it’s most common for job applicants to be subject to a credit check if the role they’re applying for deals with finances or confidential information.

Some states and cities have limited employers’ ability to use an applicant’s credit to make hiring decisions. Even in states that allow these credit checks, the FCRA has rules for how employers must proceed.

An employer cannot run your credit without your written permission. They also must first explain how the information in your credit report will be used. If your credit was used to deny you employment, they must notify you of that fact.

What Steps Can I Take If My FCRA Rights Are Violated?

If your rights under the FCRA have been violated, you may be able to sue the offending entity. If you’re successful, the damages you’ll be entitled to will depend on whether the violation was willful or negligent.

If you believe a reporting agency, reporter or receiver of your credit information violated your rights, you may want to speak to a lawyer about your options.

Summary: Credit Is Important. Know Your Rights.

Whether you’re buying a home, getting a car loan or opening a credit card, having a good credit history is vital. Bad credit can impede a person’s ability to accomplish important life goals such as investing in real estate, starting a business or consolidating debt.

While there are plenty of things you can do as an individual to ensure that your credit remains clear of any negative marks, the entities involved in the credit reporting process also have a responsibility to ensure that they’re reporting consumers’ credit in a fair and accurate way.

However, that doesn’t mean that those entities don’t mess up sometimes or that fraudulent actors won’t try to damage your credit. By knowing your rights and keeping up with your credit report, you can help ensure that your credit profile doesn’t suffer due to others’ actions.

If you’re interested in beginning the mortgage application process, you can speak with one of our Home Loan Experts today.

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