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E
.,
EDGE
Economic Education Newsletter
Checking the Files
Whether you're a fifth-grader
lending lunch money to a classmate
or a banker writing a $100,000 mortgage for a homebuyer, your basic
concern is always the same: Will
I get my money back? No lender
wants to get stuck with a bad loan,
regardless of the amount.
Will I get
my money back?
In one way or another, lenders try
to evaluate the risk associated with
extending credit. The fifth-grade
entrepreneur will probably think
twice before lending money to a
classmate who has been slow to
repay past debts. A bank's mortgage
officer will be less likely to approve a
mortgage application from someone
who declared bankruptcy last year.
Evaluating credit risk and granting credit have changed over the
years. For one thing, going into debt
has not always been as socially
acceptable as it is today. Nationwide
credit cards didn't become popular
until the 1960s. Up to that time, people seemed more cautious about
going into debt. The need to borrow
money was often looked upon as a
sign of weakness or a character flaw.
Prudent people "lived within their
means~ (Try to imagine your grandparents going into debt to finance a
February frolic in the Caribbean.)
Of course even years ago people didn't pay cash for everything.
From approximately 1920 to 1960,
there was a big increase in the use of
installment credit to finance the purchase of homes, cars, furniture, and
major appliances. And even before
that, local merchants, grocers, and
tradespeople sometimes granted
credit to regular customers who usually settled their accounts at the
end of every month.
More often than not, they are soliciting your business because you fit a
demographic profile . They may
never have seen your face or shaken
your hand, but they are able to evaluate you as a credit risk by drawing
upon information that is available to
credit grantors across the country.
Much of that information is held in
the computerized data banks of
credit bureaus.
Although a certain amount of
mystery surrounds credit bureaus,
the service they provide is straightforward and easy to understand. A
credit bureau provides lenders with
the information they need to evaluate your creditworthiness. (It's important to note that credit bureaus
do not offer recommendations on
whether or not to grant credit.
That's up to the prospective lender.)
Courtesy, Federal Reserve Bank of New York
By and large, the relationship
between lenders and borrowers
used to be more personal than it is
today. A merchant's decision to
grant credit was often based on firsthand knowledge of the customer's
financial circumstances and family
history.
That no longer holds true. Increasingly rare is the American whose
cache of junk mail doesn' t include
an occasional application from an
out-of-state bank for a credit card
with a "pre-approved" $2,500 (or
$5,000) line-of-credit. The accompanying form letters are usually
signed by senior marketing executives who don't know you, don't
know your family, and aren't at all
troubled by the fact that they have
never made your acquaintance.
There are approximately 1200
local and regional credit bureaus in
the United States. Most are linked
by computer to three national credit
bureaus: Equifax, TransUnion, and
TRW Credit Data.
The information they dispense
almost always takes the form of a
credit report, which is essentially a
summary of your payment habits
and practices . Most credit reports
contain information about loans,
charge accounts, credit cards, bankruptcies, tax liens, and judgments.
Contrary to the impression sometimes conveyed in spy novels and
thrillers, national credit bureaus do
not maintain dossiers of personal
information on private citizens. Personal information in your credit
report is generally limited to your
full name, current and previous
Federal Reserve Bank of Boston Vol. 16, No. 3 - December 1990
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
addresses, Social Security number,
year of birth, employer, and spouse's
first name (if you are married). Your
credit report should not contain
information regarding your race,
religion, gender, salary, personal assets, checking or savings accounts,
medical history, personal background, lifestyle, or criminal record.
Needless to say, citizens (and
credit bureaus) are concerned that
credit files remain confidential. The
Right to Financial Privacy Act provides that customers of financial
institutions have a right to expect
that their financial activities will
have a reasonable amount of privacy
from federal government scrutiny. It
establishes specific procedures and
exemptions concerning the release
of financial records to government
authorities.
When a potential lender requests
access to your credit file, the request
is noted on your report as an
"inquiry'.' Inquiries remain on the
report for two years.
How information gets into your
credit report is no mystery. You provide some of it yourself whenever
you apply for a new account with a
merchant or business. Credit clerks
transfer the relevant data from your
application to a computer tape, and
once a month the accumulated information is forwarded to one or more
of the national credit bureaus. Subsequent transactions, including late
payments and missed payments,
are also received and recorded by
credit bureaus.
Closed charge accounts and accounts that have no current balance
are carried on your file indefinitely,
but there's a limit on how long negative information can be carried. In
most cases, federal law requires
TnE
LEDGER
Editor: Robert Jabaily
Graphic Arts Designer: Kristen Taylor
Photography: Ralph Ragsdale
page2
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
credit bureaus to delete adverse
information from your file after
seven years, with the exception of
bankruptcy information, which may
be reported for ten years. Other
exceptions apply to credit reports
issued in conjunction with insurance policies or credit applications
for $50,000 or more, or employment
applications that involve annual salaries of $20,000 or more.
By and large, the system seems to
work well. Automated credit reporting enables a lender to process
credit applications faster and more
efficiently than might otherwise be
the case. National credit bureaus
also broaden geographical accessibility to information, which is no
minor consideration in a big country
with a highly mobile population.
All of which is not to say that the
credit reporting system is perfect.
According to an October 1990 article
in Consumer Reports, "industry data
on credit records challenged by consumers indicate that at least two
million people each year become
victims of mistakes':
Fortunately, federal regulations
provide a mechanism for correcting
those mistakes. Under the Fair Credit
Reporting Act, if a prospective lender
denied you credit within the past 30
days because of negative information in your credit report, the lender
must provide you with the name
and address of the credit bureau
that furnished the report. You are
then entitled to a prompt and free
review of your credit file. If, upon
investigation, the negative information proves incorrect, the credit
bureau must change or delete it
from your record, and anyone who
has received a copy of y9ur report
within the past six months will be
sent a corrected copy at your request.
This newsletter is published periodically
as a public service by the Federal Reseroe
Bank of Boston. The reporting of news
about economic education programs and
materials should not be construed as a
specific endorsement by the Bank. Further, the material contained herein does
not necessarily reflect the views of the
Federal Reserve Bank of Boston or the
(Even if the credit bureau cannot
verify that negative information is
incorrect, the law provides you with
the option of appending a brief
statement to your record to tell your
side of the story.)
By this point you're probably
thinking that today's system of evaluating credit risk sounds so much
more impersonal than the way it
used to be. And you're right. It is.
But before you start feeling nostalgic
for the days when lenders based
their decisions on looking you in the
eye and shaking your hand, you
should probably reflect on the fact
that the granting of credit is much
less restrictive than it once was.
Back in the "good old days" lenders
were able to deny credit on the basis
of race, religion, gender, or any
number of other arbitrary grounds,
and the prospective borrower had
little, if any, recourse.
Today, automated credit reporting
practices and federal legislation
guarantee everyone equal and objective consideration for credit. The
Equal Credit Opportunity Act prohibits discrimination against an applicant for credit because of age, sex,
marital status, religion, race, color,
national origin, or receipt of public
assistance. Moreover, if a consumer
is denied credit, the law requires
that the applicant receive written
notification of the denial. These
legal guarantees, coupled with an
efficient mechanism for reporting
objective information, help to make
credit accessible to a much broader
range of citizens . All in all, that
would seem to offset the loss of personal contact.
Thank you to Equifax Inc. and TRW Credit
Data Division for providing useful background
information on credit bureaus and credit files.
Board of Governors. Copies of this
newsletter and a catalogue of other
educational materials and research
publications may be obtained free of
charge by writing: Public Information
Center,Federal Reserve Bank of Boston,
P.O. Box 2076, Boston, MA 021062076, or by calling: (617) 973-3459.
The Updated Credit Profile Report
TRW's Credit Profile report is designed to display information
in a standard, objective, easy-to-read manner. An illustration
and description of a sample Profile report for a fictitious
person follows.
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displayed for balance reporting subscribers only.
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30 days past due
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120 days past due
150 days past due
180 days past due
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No history maintained: see status comment.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
@ Inquiries indicate a request for the applicant's credit
information - inquiring subscriber: date of inquiry: and type.
terms and amount, if available.
@ Public Record Court name. court code. docket number,
typeof public record , fili ng date, amount, and Judgment creditor.
This information may include bankruptcies. liens and/or
judgments against the applicant
@ Profile report messages alert the subscriber alJout a credit
applicant's social security number, name, address. generation.
or year of birth. See back of page for lurther explanation
Courtesy, TRW Credit Data Division
page3
Multi-Media
U.S. Monetary Policy and Financial Markets, book, published by
the Federal Reserve Bank of New
York, 231 pages.
This book offers an in-depth
description of how monetary policy
is developed by the Federal Open
Market Committee and the techniques employed to implement policy at the Open Market trading desk.
It describes the tools and the setting of policy. Also included is an
account of a day at the trading desk,
from morning information gathering through daily decision making
and the execution of an open market operation.
In addition, the book places monetary policy in a broader context,
examining the evolution of Federal
Reserve monetary policy procedures from their beginning in 1914
to the end of the 1980s. It indicates
how policy operates mos t directly
through the banking system and the
financial markets and describes key
features of both. Finally, the book
turns its attention to the transmittal of monetary policy actions to
the United States and throughout
the world.
Copies of U.S. Monetary Policy and
Financial Markets are available from
the Federal Reserve Bank of New
York. The postpaid cost is $5.00 per
copy in the United States ($10.00 for
copies ma iled outside the U.S.).
Orders should be sent to: Public
Information Department, Federal
Reserve Bank of New York, 33 Liberty Street, New York, NY 10045.
Checks must accompany orders
and should be payable to the Federal Reserve Bank of New York in
U.S. dollars.
A Guide to Business Credit for
Women, Minorities, and Small Businesses, brochure, published by the
Board of Governors of the Federal
Reserve System.
This newly revised and retitled
brochure is designed to assist
women, minorities, and small businesses in obtaining s tart-up or
additional financing. It helps to
de-mystify the commercial credit
process and provides guidance on
how to prepare the necessary loan
application documentation. Within
the guide, the reader will find some
page4
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
sources for technical assistance and
recourses to take if a credit application is not approved.
Free copies of the brochure are
available through Publications Services, MS.-138, Board of Governors of
the Federal Reserve System, Washington, D.C. 20551.
Home Mortgages: Understanding
the Process and Your Rights, brochure, published by the Board of
Governors of the Federal Reserve
System.
This recent publication describes
a mortgage, tells how to shop for
one and what to look for, outlines
the application process, and advises
a potential homebuyer how to register complaints if the consumer
thinks that he or she may have been
discriminated against. To help a
consumer make this determination,
the brochure lists some common
discrimination practices and s tates
some of the laws that provide consumers with protection regarding
home ownership.
Copies of the brochure are available through Publications Services,
MS-138, Board of Governors of the
Federal Reserve System, Washington, D. C. 20551.
The Fed: Our Nation's Central
Bank, video, 13 minutes, produced
by the Federal Reserve Bank of San
Francisco.
This new videocassette uses computer graphics and live footage to
give viewers an up-to-date look
at the Federal Reserve. The video
examines the roles of the Fed in
setting and implementing monetary
policy, promoting safety and soundness in the financial system, helping
individuals and businesses make
and receive paymen ts safely and
quickly, and acting as fiscal agent for
the U.S. government.
The 13-minute video is geared to
high school and general adult
audiences and is available for free
classroom use in three formats: ½"
VHS, ¾" U-Matic, and ½" Beta.For
more information, contact the Public
Information Department, Federal
Reserve Bank of San Francisco, P.O.
Box 7702, San Francisco, CA 94120;
phone (415) 974-2163.
NewEngland
Update
QBlA
We think we've identified a need
for a new publication to explain the
basics of banking to students in the
upper elementary school grades .
But we'd like your input before we
forge ahead.
At this point, we're leaning towards a question-and-answer format to address the ten most common
questions that kids have about
banking. That's where you come in .
Please send us your thoughts on
the matter. Better yet, survey your
students, and ask them what questions they would like our new pamphlet to cover.
We welcome everyo ne's ideas.
Send your comments to: Editor,
The Ledger, Public Services Department, Federal Reserve Bank of Boston, P. 0. Box 2076, Boston, MA
02106-2076.
More "Money Fun
For Everyone"
~
$
$
$
The Public Services Department
of the Federal Reserve Bank of
Boston will host a free program on
Thursday, December 27 at 9:30 a.m.
The two-hour program will feature a storytelling session for the
younger children, a slide show on
gen uine and counterfeit currency
for the older children, a look at the
Bank's Money Department, a view
of Boston and Boston Harbor from
the Bank's 31st floor, and light refreshments. Children of all ages are
welcome, but each child must be
accompanied by an adult.
Participants must register for the
program in advance. For reservations please call (617) 973-3452,
Monday through Friday, 9:00 a.m.
to 4:00 p.m .
@FedFRASER