Fair Credit Reporting Act (FCRA): an overview

The Fair Credit Reporting Act is a federal law that regulates consumer credit reporting agencies, such as Experian, Equifax, and TransUnion. The FCRA also regulates those who provide information to the credit reporting agencies and those who use the information in a consumer credit report.

Studies have shown that nearly 80% of consumer credit reports contain errors of some kind. Examples of the type of errors found include accounts mistakenly listed as delinquent, loans listed twice, and inaccurate personal information. As the credit reporting industry has increased their use of automated procedures, additional problems have arisen. One common such problem is when information for one person is listed on another person's report (known as a merged or mixed file). A similar problem arises when someone's identity is stolen and accounts are opened fraudulently. These fraudulent accounts then show up on the identify theft victim's credit report and can be difficult to get removed.

There are a couple of reasons why inaccurate information ends up on a credit report. First, the information provided to the credit reporting agency may itself be inaccurate. Second, the CRA might assigned the reported information to the wrong consumer's file. Whatever the reason, these mistakes may lead to a person being denied for credit or receiving credit on less favorable terms. And increasingly, many employers are reviewing a job applicant's credit history when making employment decisions, which creates the possibility of a person being denied a job based on incorrect credit report information.

Unfortunately, the FCRA does not require credit reporting agencies to report accurate information. It merely requires them to use reasonable procedures to ensure the maximum possible accuracy. The Act is a bit toothless in this regard. Where the FCRA does have some teeth, however, is in its investigation requirement. Under the FCRA, if a person disputes information in her report to a CRA, the agency must investigate the dispute and correct the disputed information. Despite this clear-cut obligation, many consumer disputes do not result in the inaccurate information being removed from their report. One possible reason for this is that the CRA's customers are lenders, not consumers. For this reason, reporting agencies have an incentive to over-include items at the expense of accuracy.

Fortunately, the CRA's failure to conduct a reasonable investigation runs afoul of the FCRA and the person may bring a lawsuit to enforce the law and hold the CRA accountable. If the consumer proves that the CRA willfully failed to conduct a reasonable investigation of the dispute, she is entitled to $1,000 in statutory damages or her actual damages (such as loss of credit, higher interest rates, or even provable emotional distress). If, however, the credit reporting agency was merely negligent in failing to conduct a reasonable investigation of the dispute, the person is only entitled to her actual damages. If no actual damages are suffered, the consumer will lose the suit. In addition, the FCRA requires the credit reporting agency to pay successful consumer litigant's reasonable attorney fees and costs.

If you learn of a mistake on your credit report, your first step is to dispute it with the credit reporting agency. If the CRA fails to correct the error after receiving your dispute letter, you may consider talking to an attorney who handles FCRA cases. The attorney will be able to recommend next steps to get the mistake fixed and will be able to advise you if a FCRA lawsuit is an option.

Credit denial due to your credit report? What to do next.

If  your loan application has been turned down, or if your interest rate is higher than it should be, the first thing you should do is find out why. Under federal law, a lender is required to tell you certain things if it denied your credit application or took "adverse action," such as increasing your interest rate. These things include:

• The name, address, and telephone number of the credit reporting agency that provided the report the lender used;

• The credit score it used in making its lending decision and the key factors that affected this score;

• Inform you of your right to obtain a free copy of your credit report from the credit reporting agency that provided the report; and

• The process for fixing mistakes on your credit report.

This information will most likely be provided to you in a letter, called an adverse action notice. Once you have this letter, you should follow the instructions for obtaining a copy of the credit report that the lender used. It can usually be obtained online through the credit reporting agency's website.

Once you have your credit report, you should review it for common errors. If you see accounts that don't belong to you or accounts showing a balance that you've paid off, the next step is to dispute these errors with the credit bureaus.

It's important to note that you must dispute the errors with the credit reporting agencies (ie. Experian, Equifax, or Trans Union) not the creditor (ie. Capital One, Wells Fargo, etc.) to protect your rights.

When the credit reporting agency receives your dispute, they are required to investigate. They are also required to communicate your dispute to the creditor that is reporting the inaccurate information. The creditor is also required to investigate your dispute. Generally, these investigations must be completed within 30 days and the credit reporting agency must notify you of the results of the investigations within 5 business days of the day the investigations were completed.

If the credit reporting agency hasn't corrected the inaccurate information after completing its investigation, you might consider writing a more detailed dispute letter and providing additional documents or information to support your dispute. You may also consider talking to a lawyer who handles credit reporting cases for advice about what to do next. If the credit reporting agency or creditor didn't conduct a reasonable investigation of your dispute, you may have legal claims against them under the Fair Credit Reporting Act. An attorney can advise you about these possible claims and help you with the next steps.

Can my employer run a credit check on me?

If you've had financial issues, you might not want a potential employer to know--and you sure don't want the jerk that's your boss to know your private business. But more often employers and potential employers are pulling credit reports on you. This is especially common in workplaces where you may handle money, like a bank. Under the federal Fair Credit Reporting Act (FCRA), an employer can only perform a credit check on you if you have given your permission. They may get it by adding a line into your job application, something like "by signing below, you authorize Acme Inc. to obtain credit reports." If you are already employed and not sure whether your boss has authority to run a credit report on you, you can ask your human resources department.

But here's the tricky part for employers. If they decide to take an "adverse action" (i.e. not hiring you, not promoting you, or firing you) as a result of information contained in a credit report, there are rules they have to follow:

• The employer must provide you with a copy of the report they used before they take the adverse action

• The employer must provide you with a notice explaining which credit reporting agency supplied the negative information, and that you have a right to dispute the accuracy of your credit report

• You are entitled to a free credit report within sixty days of the adverse action--even if you've already gotten your free credit reports from annualcreditreport.com. Just contact the credit reporting agency to order it

If they fail to give you the required notice, they may have violated the FCRA. Violations can result in being awarded actual damages, statutory damages between $100-$1000, and attorneys fees, which means you may only have to pay your attorney if you win your case.