The world economy runs on credit. Most people could never buy a car, own a house, or pay for a college education if they couldn't apply for a loan or mortgage from a bank or other credit lending institution.
These lending institutions take a risk when they give a loan to a consumer. What if the borrower loses his job and can't pay back the loan? What if he or she invests poorly in real estate and has to declare bankruptcy? The only way a lending institution can calculate the risk of lending money to a consumer is to check that individual's credit report and credit score.
Credit reports and scores are compiled and calculated by private companies called credit reporting agencies (CRAs). In the United States, credit reporting is dominated by the "big three" national CRAs: Experian, TransUnion and Equifax. However, there are hundreds of smaller regional and specialty credit reporting agencies throughout the country.
These credit reports contain records of all outstanding debts; payment history on credit cards, mortgages and other loans; defaulted payments and bankruptcy information and even public records pertaining to financial history. Credit scores are three-digit numbers -- ranging from 300 to 800 -- that are calculated using the information on a credit report.
Banks and other lenders decide whether to extend credit -- and at what interest rate -- based largely on the credit information provided by the CRAs. That's why credit reports and CRAs are so powerful. A negative credit event, like a foreclosure or bankruptcy, can stay on your credit report for up to 10 years, crippling your ability to receive new credit. Even worse, recent studies reveal that one out of every four credit reports contain serious errors (some caused by identity theft) that can wrongfully stain a consumer's credit history [source: MSNBC].
Since CRAs play such a pivotal role in the credit process, the United States government has established rules mandating what credit information can be collected and with whom it can be shared. These rules make up the basis of the Fair Credit Reporting Act, or the FCRA.
In this article, we'll learn what life was like for borrowers before the FCRA and come to understand your rights regarding your credit report under this important law. Let's start by looking back at a time when CRAs answered to no one and credit reports were hidden from consumers.