What is the Fair Credit Reporting Act (FCRA)?

The Fair Credit Reporting Act (FCRA) is the principle legislation for consumer credit rights in the U.S. It regulates the collection, distribution, and use of consumer credit information.

How Does the Fair Credit Reporting Act (FCRA) Work?

The FCRA specifies rules for the collection and distribution of credit data from consumers. The organizations that collect and distribute this data are called consumer reporting agencies. One type of consumer reporting agency is a credit bureau, which collects and stores a consumer's credit report. Consumer reporting agencies collect and disclose data about consumers' credit information, along with other information like addresses and employment status.

According to the FCRA, credit reporting agencies must allow consumers to access their own credit reports once a year. This is stated in the Fair and Accurate Credit Transactions Act (FACTA) which is an amendment to the FCRA. Other rules regulate how long negative information such as bankruptcies, late payments and tax liens can appear on a consumer's credit report.

In addition to regulating and organizing how consumer credit information is collected and distributed, the FCRA also describes the procedures creditor institutions like banks, auto loan companies and credit card companies should follow when using a consumer's credit history. For example, such institutions have the responsibility to let consumers know about negative information that appears on their credit reports if they do not already know, and they are responsible for investigating disputed information with the credit reporting agencies on behalf of consumers. They are also required by FCRA to report back to the credit reporting agencies when consumers have been informed about the status of their credit reports. In this way, the FCRA lays out the order of communication that must take place between creditor institutions, credit reporting agencies and consumers.

Why Does the Fair Credit Reporting Act (FCRA) Matter?

With its set of rules, the FCRA organizes a system of communication between consumers, creditor institutions and credit reporting agencies, which creates more fairness and transparency in the credit industry.

Banks and other credit institutions are dependent on receiving accurate credit report information about consumers to determine if it is safe to lend money to them. Conversely, consumers need a way to be informed about the status of their credit history so that they are aware of their personal creditworthiness. If there is a disagreement between the information presented by credit reporting agencies and the consumer about his or her credit history, the FCRA provides a way for the consumer to appeal the negative history on the credit report.