Chapter VI. Credit Reporting

• Jurisdiction: United States

VI. Credit Reporting

Finding out a major vendor has defaulted is never a good feeling. Inevitable questions arise: How can we collect from the vendor? What assets can we potentially access? How could we have prevented this from happening in the first place? This last question is particularly important. An investigation into a company's credit and assets can help businesses assess the risk of nonpayment, take measures to protect themselves in the event a default occurs, and ultimately decide whether to pursue a business relationship in the first place. Credit reports are valuable tools that businesses can use to evaluate creditworthiness before entering into a transaction with business or consumer.

Credit reports play a critical financial role for businesses and consumers alike. Most decisions to extend credit turn on credit reports as well as credit scores that are derived from the information in credit-reporting files to determine the likelihood of repayment of a loan. Credit reports can also impact the cost of insurance premiums, rental properties and loan interest rates. Given the widespread use of credit reports, as well as credit scores, the accuracy of the information underlying credit reports is a major policy concern. Credit-scoring algorithms depend on the credit and payment history recorded in the credit-reporting file. Inaccurate information can cause low credit scores, which can effectively preclude businesses and consumers from securing financing.

Through the passage of the Federal Credit Reporting Act (FCRA) in 1970, Congress recognized the importance of ensuring the accuracy of the information underlying credit reports. The FCRA requires credit-reporting agencies to establish "reasonable procedures to assure maximum possible accuracy" of consumer credit reports.⁶⁷ The FCRA also sets limits on the amount of time certain adverse events can remain a part of a consumer credit report.⁶⁸

Understanding what information goes into a credit report and how credit scores are calculated is the key to properly interpreting credit reports. Credit reports are based on publicly available information, such as legal filings and liens. Credit bureaus also rely on information provided from vendors, suppliers and lenders. Vendors and suppliers report information regarding credit and payment activity. Information that is sent to credit bureaus is voluntary, and not all vendors and suppliers provide this information.

In general, credit reports include information...