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90 Fed. Res. Bull. 297 (2004)
Credit Report Accuracy and Access to Credit

handle is hein.journals/fedred90 and id is 313 raw text is: Credit Report Accuracy and Access to Credit Robert B. Avery, Paul S. Calen, and Glenn B. Canner, qf the Board's Division of Research and Statistics, prepared this article. Shannon C. Mok provided research assistance. Information that credit-reporting agencies maintain on consumers' credit-related experiences plays a cen- tral role in U.S. credit markets. Creditors consider such data a primary factor when they monitor the credit circumstances of current customers and evalu- ate 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 consis- tency 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 (statis- tical characterizations of an individual's creditworthi- ness based exclusively on credit record information) and less on labor-intensive reviews of the detailed information in credit reports. Moreover, decision- makers in areas unrelated to consumer credit, includ- ing employment screening and underwriting of prop- erty 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 ambig- uous, duplicative, or incomplete and that such limi- tations 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 I Robert B. Avery, Raphael W. Bostic, Paul S. Calem, and Glenn B. Canner (2003), An Overview of Consumer Data and Credit Reporting, Federal Reserve Bulletin, vol. 89 (February), pp. 47-73. 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 prob- lems 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 limita- tions 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, assess- ments 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 fac- tors that compose the model. Because information about credit-scoring models and their factors is ordi- narily proprietary, it is difficult to obtain. In this article, we expand on the available research by presenting an analysis that tackles these complexi- ties and quantifies the effects of credit record limi- tations on the access to credit.3 The analysis consid- ers the credit records of a nationally representative sample of individuals, drawn as of June 30, 2003, that incorporates improvements in the reporting sys- tem over the past few years and, consequently, better reflects today's circumstances. We examine the pos- sible effects of data limitations on consumers by estimating the changes in consumers' credit history scores that would result from correcting data prob- lems in their credit records. We also investigate 2. General Accounting Office (2003). Consumer Credit: Limited Information Exists on Extent of Credit Report Errors and Their Implications for Consumers, report prepared for the Senate Commit- tee on Banking, Housing, and Urban Affairs, GAO-03-1036T, July 31, pp. 1-18. In 2004, the General Accounting Office became the Govern- ment Accountability Office. 3. This analysis builds on recent research that attempted to quantify the effects of credit record limitations on the access to credit. See Robert B. Avery, Paul S. Calem, and Glenn B. Canner (2003), Credit Reporting and the Practical Implications of Inaccurate or Missing Information in Underwriting Decisions, paper presented at Build- ing Assets, Building Credit: A Symposium on Improving Financial Services in Low-income Communities,' Joint Center for Housing Studies, Harvard ULniversity, November 18-19.

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