Fair Credit Reporting Act

Credit Reporting Agencies

These Pakistani fruit merchants sell their pomegranates locally. But selling goods over long distances usually requires payment in the form of credit.
These Pakistani fruit merchants sell their pomegranates locally. But selling goods over long distances usually requires payment in the form of credit.
Robert Nickelsberg/Getty Images

Credit reporting agencies, also known as consumer credit bureaus, first appeared in the United States in the late 19th century [source: Federal Reserve Bank of Philadelphia]. These early CRAs were loose organizations of local merchants and banks that shared credit information about their clients. In those days, the lenders actually knew the people to whom they were giving loans. Therefore, credit was extended or denied on the basis of personal trust.

But as banks and businesses went national and began to extend credit to borrowers across the country, a market grew for fast, reliable credit information. A national trade organization called Associated Credit Bureaus, Inc. (ACB) was founded in 1906 to establish standards and procedures for collecting and sharing consumer credit information. By the mid-1950s, the ACB had nearly 1,600 member organizations, all small local or regional CRAs [source: Federal Reserve Bank of Philadelphia].

The problem was that CRAs were private companies who answered to no government authority or regulation. Credit reports in those days contained exclusively negative financial information and there were no limits to how long a negative event could stay on the report.

Before the FCRA, consumers had no right to view their credit reports, even if they were denied credit because of the information in a particular report. If a consumer believed he or she was denied credit based on erroneous information, there was no recourse to correct it.

Credit reports also contained lifestyle information on consumers that had no direct relation to their credit-worthiness, like drinking habits, sexual orientation and even cleanliness.

Since there were no limits on who could read the contents of a credit report, consumers were often denied other nonfinancial opportunities, like insurance or employment, based on information in their reports. Even worse, in the 1960s, investigators working for the CRAs began to make up negative information about consumers to fill quotas on their subjects [source: Electronic Privacy Information Center]. News of this abuse led to the first congressional inquiries into the credit reporting industry.

In 1970, Congress passed the Fair Credit Reporting Act (FCRA), which went into effect the following year. There have been several important amendments to the FRCA, including the Consumer Credit Reporting Reform Act of 1996 and the Fair and Accurate Credit Transactions Act of 2003 (FACTA). The FCRA and its amending acts are enforced by the Federal Trade Commission (FTC).

Now, let's look at the important rights and protections afforded by the FCRA and its amendments.

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