Trans union credit report

Information that credit-reporting agencies maintain on consumers' credit-related experiences plays a central role in U.S. credit markets. Creditors consider such data a primary factor when they monitor the credit circumstances of current customers and evaluate the creditworthiness of prospective borrowers. Analysts widely agree that the data enable domestic consumer credit markets to function more efficiently and at lower cost than would otherwise be possible.

Despite the great benefits of the current system, however, some analysts have raised concerns about the accuracy, completeness, timeliness, and consistency of consumer credit records and about the effects of data limitations on the availability and cost of credit. These concerns have grown as creditors have begun to rely more on "credit history scores" (statistical characterizations of an individual's creditworthiness based exclusively on credit record information) and less on labor-intensive reviews of the detailed information in credit reports. Moreover, decisionmakers in areas unrelated to consumer credit, including employment screening and underwriting of property and casualty insurance, increasingly depend on credit records, as studies have shown that such records have predictive value.

A previous article in this publication examined in detail the credit records of a large, nationally representative sample of individuals as of June 30, 1999. (1) That analysis revealed the breadth and depth of the information in credit records. It also found, however, that key aspects of the data may be ambiguous, duplicative, or incomplete and that such limitations have the potential to harm or to benefit consumers.

Although the earlier analysis contributed to the debate about the quality of the information in credit records, it did not attempt to quantify the effects of data limitations on consumers' access to credit. To date, publicly available information about the extent of data quality problems has been limited, as has research on the effects of those problems. (2) The lack of information has inhibited discussion of the problems and of the appropriate ways to address them.

The main reason for the lack of information is that conducting research on the effects of data limitations on access to credit is complicated. Two factors account for the complexity. First, the effects vary depending on the overall composition of the affected individual's credit record. For example, a minor error in a credit record is likely to have little or no effect on access to credit for an individual with many reported account histories, but the same error may have a significant effect on access to credit for someone with only a few reported account histories. Second, assessments of the effects of data limitations require detailed knowledge of the model used to evaluate an individual's credit history and of the credit-risk factors that compose the model. Because information about credit-scoring models and their factors is ordinarily proprietary, it is difficult to obtain.

In this article, we expand on the available research by presenting an analysis that tackles these complexities and quantifies the effects of credit record limitations on the access to credit. (3) The analysis considers the credit records of a nationally representative sample of individuals, drawn as of June 30, 2003, that incorporates improvements in the reporting system over the past few years and, consequently, better reflects today's circumstances. We examine the possible effects of data limitations on consumers by estimating the changes in consumers' credit history scores that would result from "correcting" data problems in their credit records. We also investigate whether different patterns emerge when individuals in the sample are grouped by strength of credit history (credit history score range), depth of credit history (number of credit accounts in a credit record), and selected demographic characteristics (age, relative income of census tract of residence, and percentage of minorities in census tract of residence). Such segmentation allows us to determine whether the effects of data limitations differ for various subgroups of the population.

CONSUMER CREDIT REPORTS

A consumer credit report is the organized presentation of information about an individual's credit record that a credit-reporting agency communicates to those requesting information about the credit history of an individual. It includes information on an individual's experiences with credit, leases, non-credit-related bills, collection agency actions, monetary-related public records, and inquiries about the individual's credit history. Credit reports, along with credit history scores derived from the records of credit-reporting agencies, have long been considered one of the primary factors in credit evaluations and loan pricing decisions. They are also widely used to select individuals to contact for prescreened credit solicitations. More recently, credit reports and credit history scores have often been used in identifying potential customers for property and casualty insurance and in underwriting and pricing such insurance. (4)

The three national credit-reporting agencies--Equifax, Experian, and Trans Union--seek to collect comprehensive information on all lending to individuals in the United States, and as a consequence, the information that each agency maintains is vast. Each one has records on perhaps as many as 1.5 billion credit accounts held by approximately 210 million individuals. (5) Together, these agencies generate more than 1 billion credit reports each year, providing the vast majority of the reports for creditors, employers, and insurers. One study found that consumers receive only about 16 million of the credit reports distributed each year. (6)

Credit-reporting agencies collect information from "reporters"--creditors, governmental entities, collection agencies, and third-party intermediaries. They generally collect data every month, and they typically update their credit records within one to seven days after receiving new information. According to industry sources, each agency receives more than 2 billion items of information each month. To facilitate the collection process and to reduce reporting costs, the agencies have implemented procedures to have data submitted in a standard format, the so-called Metro format. (7) Data may be submitted through various media, including CD-ROM and electronic data transfer. Reporters submit information voluntarily: No state or federal law requires them to report data to the agencies or to use a particular format for their reporting. As a result, the completeness and frequency of reporting can vary.

Using Credit Records to Evaluate Creditworthiness

In developing credit history scores, builders of credit-scoring models consider a wide variety of summary factors drawn from credit records. In most cases, the factors are constructed by combining information from different items within an individual's credit record. These factors compose the key elements of credit models used to generate credit history scores. Although hundreds of factors may be created from credit records, those used in credit-scoring models are the ones proven statistically to be the most valid predictors of future credit performance. The factors and the weights assigned to each one can vary across evaluators and their different models, but the factors generally fall into four broad areas: payment history, consumer indebtedness, length of credit history, and the acquisition of new credit. (8)

Payment History

The most important factors considered in credit evaluation are those that relate to an individual's history of repaying loans and any evidence of non-credit-related collections or money-related public actions. Credit evaluators consider whether an individual has a history of repaying balances on credit accounts in a timely fashion. The analysis takes into account not only the frequency of any repayment problems but also their severity (lateness), date of occurrence (newness), and dollar magnitude. Evaluators assess repayment performance on the full range of accounts that an individual holds, distinguishing accounts by type (such as revolving, installment, or mortgage) and by source (such as banking institution, finance company, or retailer). In general, an individual with serious deficiencies in repayment performance, such as a credit account that is currently delinquent, will find qualifying for new credit difficult, may face higher interest rates for the credit received, or may be limited in further borrowing on existing revolving accounts.

Consumer Indebtedness