Credit Reporting Literacy:

Consumers Understood the Basics but Could Benefit from Targeted Educational Efforts

GAO-05-223: Published: Mar 16, 2005. Publicly Released: Mar 16, 2005.

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This report responds to a mandate in the Fair and Accurate Credit Transactions Act (FACT Act) of 2003 requiring GAO to assess consumers' understanding of credit reporting. The FACT Act, among other things, extended provisions governing the credit reporting system and addressed ongoing concerns about inaccuracies in credit reports. For example, the act expanded access to credit information by entitling consumers to one free credit report each year. It also established the Financial Literacy and Education Commission (FLEC) to improve consumers' understanding of credit issues. This report examines consumers' understanding and use of credit reports and scores and the dispute process and looks at factors that may influence their understanding of credit reporting.

Based on survey responses for a national sample of 1,578 consumers, GAO found that consumers understood the basics of credit reporting and the dispute process. For example, many consumers understood what a credit report contained and the sources of this information, and about 60 percent had seen their credit reports. However, many consumers did not know more detailed information, such as how long items remained on their credit reports or the impact their credit history could have on insurance rates and potential employment. Further, most consumers knew what a credit score was, and approximately one-third had obtained their credit scores, but many did not know that some behaviors--such as using all their available credit--could negatively affect their scores. Similarly, GAO found that most consumers knew they had the right to dispute information on their credit reports, and a small percentage (18 percent) had disputed inaccuracies. But most consumers did not fully understand their rights in the dispute process--for example, that there is no cost to dispute inaccurate information or that they could contact the Federal Trade Commission, the federal agency primarily responsible for enforcing consumers' rights with respect to credit reporting agencies (CRAs), if they could not resolve a dispute with the CRAs. GAO also found that several factors were associated with consumers' knowledge. For instance, having less education, lower incomes, and less experience obtaining credit were associated with lower survey scores, while having certain types of credit experiences--such as an automobile loan or a mortgage--were associated with higher scores. Other factors, such as gender and living in a state where credit reports were free prior to the FACT Act, did not have a significant effect on consumers' knowledge. Educational efforts could potentially increase consumers' understanding of the credit reporting process. These efforts should target those areas in which consumers' knowledge was weakest and those subpopulations that did not score as well on GAO's survey.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In response to our recommendation, the Federal Trade Commission has continued to build on its outreach efforts to improve consumer financial literacy, including increasing awareness of the credit reporting system. Specifically, FTC has issued a number of publications that describe credit reports and credit scores, and explain federal credit laws that protect consumers' rights to obtain, use, and maintain credit and discusses FTC's role in enforcing these laws. FTC uses a number of formats with varying degrees of detail and complexity to reach different audiences. FTC has expanded its outreach efforts on credit, including significant educational activities in those regions where the free annual credit report program has gone into effect. FTC participated in a number of programs to remind all Americans of their right to a free credit report through the media and community based organizations, and through partnerships with financial institutions, schools, universities, and other organizations with an interest in financial literacy. As part of this expanded outreach effort, the FTC prepared a new brochure that explains credit reports and consumers' rights under the Free Annual File Disclosures Rule, 16 C.F.R. Parts 610 and 698. The brochure, Your Access to Free Credit Reports outlines the timetable for implementing the free report right, explains the ordering process, and includes a copy of the standard credit report request form. This publication is available in English and Spanish. The FTC also revised the Statement of Rights under the Fair Credit Reporting Act (FCRA). This provision requires consumer reporting agencies to give consumers a statement setting out their rights under FCRA when they request a copy of their credit report, including a free credit report available under the FACT Act. Consumers who file a complaint relating to their credit report with the FTC receive the summary of rights statement along with the other information they may request. Besides its publications, staff attorneys and FTC senior managers speak to community leaders and law enforcement across the country on the credit reporting system. The agency uses exhibits at large national conventions of consumer groups and local and national conferences to provide people with information about credit. FTC's seven regional offices uses an exhibit structure with panels about credit rights for public events.

    Recommendation: In addition, the Chairman of FTC, through ongoing educational initiatives, materials, and public announcements, and in light of FTC's responsibility to protect consumers and enforce consumer rights, should encourage consumers to obtain their credit reports and credit scores and if necessary, dispute inaccurate information on their reports.

    Agency Affected: Federal Trade Commission

  2. Status: Closed - Implemented

    Comments: In response to our recommendation, the Federal Trade Commission has continued to build on its outreach efforts to improve consumer financial literacy, including increasing awareness of the credit reporting system. FTC uses a number of formats with varying degrees of detail and complexity to reach different audiences. Specifically, the FTC has issued numerous publications on the use of credit reports and credit scores and updated some to reflect legislative changes to consumer rights under the FACT Act. For example, FTC's new brochure, Your Access to Free Credit Reports, outlines how credit reports might be used, who can access your credit report, and how long negative information can be reported on a person's credit history. In March 2005, FTC also issued a FTC Consumer Alert on "Negative Credit can Squeeze a Job Search," which explain how bad credit can affect your ability to get or keep a job. Besides its publications, staff attorneys and FTC senior managers speak to community leaders and law enforcement across the country on the credit reporting system. The agency uses exhibits at large national conventions of consumer groups and local and national conferences to provide people with information about credit. FTC's seven regional offices uses an exhibit structure with panels about credit rights for public events.

    Recommendation: In addition, the Chairman of FTC, through ongoing educational initiatives, materials, and public announcements, and in light of FTC's responsibility to protect consumers and enforce consumer rights, should improve consumers understanding of how credit reports and scores are used.

    Agency Affected: Federal Trade Commission

  3. Status: Closed - Implemented

    Comments: In response to our recommendation, the Office of Domestic Financial under Treasury's mandate in the Fair Credit Reporting Act and its membership on the Financial Literacy and Education Commission has expanded efforts through its membership and partnerships to provide financial education on credit reporting issues. In the National Strategy for Financial Literacy, the Commission targets kindergarten through postsecondary financial education and recommends (1) integrating financial education into K-12 curricula, (2) providing teachers with training and support to effectively teach financial education topics, (3) providing teachers with effective financial literacy materials, curricula, and resources, (4) increasing financial literacy by reaching youth in non-traditional venues, and (5) increasing the financial skills of postsecondary students. The Strategy also includes targeted opportunities to reach multilingual, multicultural populations by (1) promoting participation in the financial services process through increased understanding of the system, (2) changing perceptions about the accessibility of homeownership, and (3) improving access to financial services.

    Recommendation: Consistent with FLEC's and Treasury's mandate under FCRA, as amended by the FACT Act to improve consumers' understanding of credit reports, credit scores, and the need to dispute inaccurate information, and in targeting certain subpopulations, FLEC should expand efforts to provide financial education on credit reporting issues, for example in high school curriculums and in venues likely to reach Hispanics.

    Agency Affected: Department of the Treasury: Office of Domestic Finance: Financial Literacy and Education Commission

  4. Status: Closed - Implemented

    Comments: Consistent with our recommendation the Secretary of the Treasury, in his capacity as Chairman of the Financial Literacy Education Commission (FLEC), has worked through its members to develop the National Strategy for Financial Literacy. Citing our report, this strategy calls for action for improving consumers' understanding of credit reports, credit scores, and their federal rights to dispute inaccurate information and obtain free credit reports. A new Federal publication--Your Access to Free Credit Reports--defines key terminology, the parties involved in credit, federal rights under the Fair Credit Reporting Act, and the new free credit report rule. This publication is being widely distributed. Treasury's inclusion of credit literacy in its multimedia campaign responds to the overall emphasis on credit in the FACT Act and GAO's survey findings that many Americans lack knowledge of credit reporting issues. In response to our recommendation to target those populations that scored the lowest on our survey, both the National Strategy for Financial Literacy and Treasury's multimedia campaign includes specific actions to target age groups under 25, and Hispanics, as well as specific actions to target older population groups focusing on retirement savings and consumer protection issues. Specifically, Treasury's multimedia campaign targets young adults (18-24 years old), with its primary objective to encourage more thoughtful and conscientious use of credit, as well as to educate young adults on credit management and to understand their credit history and score. In response to our recommendation, the FLEC also has expanded efforts through its membership and partnerships to provide financial education on credit reporting issues. As part of their National Strategy, the Commission targets kindergarten through postsecondary financial education and recommended several actions for integrating financial education into K-12 curricula and postsecondary education venues. The Commission targeted opportunities to reach multilingual, multicultural populations by (1) promoting participation in the financial services process through increased understanding of the system, (2) changing perceptions about the accessibility of homeownership, and (3) improving access to financial services. The collective actions of the Treasury and members of the Commission should improve consumers' understanding of their federal rights in credit reporting.

    Recommendation: Consistent with FLEC's and Treasury's mandate under the Fair Credit Reporting Act (FCRA), as amended by the FACT Act to improve consumers' understanding of credit reports, credit scores, and the need to dispute inaccurate information, the Secretary of the Treasury, in his capacity as Chairman of FLEC, should work with its members to improve consumers' understanding of their federal rights through FLEC's national strategy and Treasury's multimedia campaign, targeting those populations that scored the lowest on our survey--for example, consumers with less than a high school education and relatively low income levels, certain age groups (under 25 and 65 and older), and Hispanics.

    Agency Affected: Department of the Treasury

  5. Status: Closed - Implemented

    Comments: In response to our recommendation, the Federal Trade Commission has continued to build on its outreach efforts to improve consumer financial literacy, including increasing awareness of the credit reporting system. Specifically, FTC has issued and updated a number of publications that describe credit reports and credit scores, and explain federal credit laws that protect consumers' rights to obtain, use, and maintain credit and discusses FTC's role in enforcing these laws. FTC uses a number of formats with varying degrees of detail and complexity to reach different audiences. Besides its publications, staff attorneys and FTC senior managers speak to community leaders and law enforcement across the country on the credit reporting system. The agency uses exhibits at large national conventions of consumer groups and local and national conferences to provide people with information about credit and that FTC is the federal agency responsible for enforcing consumer rights in credit reporting. FTC's seven regional offices uses an exhibit structure with panels about credit rights for public events.

    Recommendation: In addition, the Chairman of FTC, through ongoing educational initiatives, materials, and public announcements, and in light of FTC's responsibility to protect consumers and enforce consumer rights, should educate consumers about FTC's role in enforcing consumers' rights in credit reporting.

    Agency Affected: Federal Trade Commission

 

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