Consumer Credit Report: Overview of Accounts, Records, and Utilization Rates, Lecture notes of Finance

Download Consumer Credit Report: Overview of Accounts, Records, and Utilization Rates and more Lecture notes Finance in PDF only on Docsity! An Overview of Consumer Data and Credit Reporting. Robert B. Avery, Paul S. Calem, and Glenn B. Can- ner, of the Board's Division of Research and Statis- tics, and Raphael W. Bostic, of the University of Southern California, prepared this article. For some time, the Board of Governors of the Federal Reserve System has sought to obtain more detailed and timely information on the debt status, loan payment behavior, and overall credit quality of U.S. consumers. Such information could facilitate the Board's analysis of macroeconomic conditions, improve its understanding of the way credit is pro- vided to consumers, and enhance the System's super- vision of banking activities. For decades, information of this type has been gathered by credit reporting companies, primarily to assist creditors in evaluating the credit quality of current and prospective custom- ers. The information gathered by credit reporting companies is vast and seeks to cover virtually all U.S. consumer borrowing. [note: 1]. The Fair Credit Reporting Act generally refers to a company that regularly assembles or evaluates consumer credit information for the purpose of furnishing consumer reports as a "consumer reporting agency.'' Such companies are also called "credit bureaus' ' or, as in this article, "credit reporting companies.'' Three national credit report- ing companies—Equifax, Experian, and Trans Union Corporation— jointly have a dominant presence in the market for credit-related information on consumers. Each national credit reporting company seeks to maintain records for each individual, although, for a variety of reasons, all companies may not have the same information for a given individual. For more information on industry structure, see Robert M. Hunt, "What 's in the File? The Economics and Law of Consumer Credit Bureaus,'' Business Review, Federal Reserve Bank of Philadelphia (second quarter, 2002), pp. 17-24. [end of note.] To the extent that this informa- tion is complete, comprehensive, and accurate, it represents a potential new source of statistical data for the Federal Reserve on consumer credit markets and behavior. To evaluate the potential usefulness of these data, the Federal Reserve Board engaged one of the three national credit reporting companies to supply the records of a nationally representative sample of individuals. [note: 2]. Identifying information, such as name, address, and social secu- rity number, was omitted from the data obtained by the Federal Reserve. The identities of the creditors, collection agencies, and other entities that reported information to the credit reporting company were also omitted. An index variable, unique to this dataset, allowed records of the same individual to be linked. A similar index variable allowed records of the same creditor (or other reporter) to be linked. Neither of these variables could be used to link to any publicly available information. [end of note.] The data provide a unique opportunity to profile the nature and content of information con- tained in credit reporting company records. Assessing the usefulness of these data as a poten- tial source of information for the Board involves several tasks. This article is an initial step in the process; it examines the scope and content of the data, using a framework based on key aspects of credit evaluation. This approach is a natural way to begin the assessment process because the credit reporting companies' primary purpose for collecting these data is to facilitate credit evaluation. Future steps will focus on other aspects of this evaluation, including comparing measures of aggregate borrow- ing activity and credit quality derived from the credit reporting data with measures from other sources. The article begins with a brief description of the way the credit reporting companies compile and report their data and gives background on the regula- tory structure governing these activities. This descrip- tion is followed by a detailed look at the information collected in credit reports. The discussion of these data is divided along the lines of the major com- ponents of consumer credit report data—credit accounts; public records relating to the person's debt or payment obligations (bankruptcy filings, liens, judgments in civil actions, and so on); collection agency accounts; and inquiries regarding credit sta- tus. The distribution patterns of items such as account balances, credit utilization, and measures of payment performance by type of account and creditor are broadly described. Key aspects of the data that may be incomplete, duplicative, or ambiguous as they apply to credit evaluation are highlighted in the analysis. The article concludes with a discussion of steps that might be taken to address some of the issues identified. [beginning of box:] A Summary of Consumer Rights under the Fair Credit Reporting Act The federal Fair Credit Reporting Act (FCRA) seeks to promote accuracy, fairness, and privacy of an individual's ' 'consumer report'' maintained by a ''consumer reporting agency''(or credit reporting company). [note: 1]. For the complete text of the FCRA, see 15 U.S.C. §§ 1681-1681u, on the Federal Trade Commission's web site (http://www.ftc.gov). [end of note.] The FCRA pro- vides the following consumer rights and protections: • The right to be told if information in a consumer report has been used to take adverse action against a consumer. Any person who uses information from a consumer report obtained from a consumer reporting agency to take adverse action against a consumer—such as denying an application for credit, insurance, or employment—must tell the consumer the name, address, and phone number of the reporting agency that provided the consumer report, inform the consumer of the right to obtain a free copy of his or her consumer report within sixty days of receiving the notice, and notify the con- sumer of the right to dispute with the reporting agency the completeness or accuracy of the consumer report. • The right to see the contents of a consumer report. Upon a consumer's request, a consumer reporting agency must provide the consumer with all information in his or her file at the time of the request, except for credit scores, and identify each person who has requested it recently. There is no charge for the report if an adverse action has been taken against the consumer because of information in a consumer report supplied by the reporting agency and the consumer requests the report within sixty days of receiving notice of the adverse action from the person taking the adverse action. • The right to dispute inaccurate or incomplete informa- tion with the consumer reporting agency. If a consumer notifies a reporting agency that his or her file contains inaccurate or incomplete information, the agency must investigate the items (generally within thirty days) by presenting to the furnisher or source of the information all relevant evidence submitted by the consumer, unless the agency determines that the dispute is frivolous. The fur- nisher or source must review the evidence, investigate the disputed information, and report its findings to the report- ing agency. The agency must provide the consumer with a written notice of the results of the investigation, a copy of the consumer report as revised based on the results of the investigation, notice of the procedures used in the investi- gation (including the furnishers contacted), notice of the consumer's right to add a statement to the file disputing the accuracy or completeness of the information, and notice of the consumer's right to request that the report- ing agency notify certain recent recipients of consumer reports of the deletion of the disputed information. [end of box.] COMPOSITION AND SOURCES OF CREDIT REPORTING COMPANY RECORDS. Credit reporting companies gather information on an individual's experiences with credit, leases, non- credit-related bills, money-related public records, and inquiries and compile it in a credit record. A credit record generally includes five types of information: • identifying information such as the name of the individual, current and previous residential addresses, and social security number • detailed information reported by creditors (and some other entities, such as a medical establishment) on each current and past loan, lease, or non-credit- related bill, each of which is referred to here as a credit account [note: 3]. Non-credit-related bills include items such as utility and medical bills. [end of note.] • information derived from money-related public records, such as records of bankruptcy, foreclosure, tax liens (local, state, or federal), garnishments, and other civil judgments, referred to here as public records • information reported by collection agencies on actions associated with credit accounts and non- credit-related bills, referred to here as collection agency accounts • identities of individuals or companies that request information from an individual's credit record, the date of the inquiry, and an indication of whether the inquiry was by the consumer, for the review of an existing account, or to help the inquirer make a decision on a potential future account or relationship. The consumer credit report, the basic product that the credit reporting companies provide to those seek- ing information about the credit history of an indi- vidual, is the organized presentation of the individu- al's credit record at the credit reporting company. [note: 4]. Credit reporting companies maintain credit records of individu- als, not couples or other family units. Therefore, an individual's credit report is separate and distinct from his or her spouse's report. If individuals are jointly responsible for payment on a loan, such as a mortgage, a record of that credit account will appear in each individu- al 's file, along with an indicator that it is a joint account. [end of note.] Industry sources report that credit reporting compa- nies issue approximately 2 million consumer credit tive credit risk posed by prospective borrowers. [note: 10]. See Robert B. Avery, Raphael W. Bostic, Paul S. Calem, and Glenn B. Canner, ' 'Credit Risk, Credit Scoring, and the Performance of Home Mortgages,' ' Federal Reserve Bulletin (July 1996), pp. 621-48. [end of note.] Nonetheless, the industry and its critics alike recom- mend that consumers review their credit reports peri- odically, especially if they are in the market for new credit, if they have been denied credit, or if their creditor has changed the terms of an account on the basis of credit reporting company information. DESCRIPTION OF CREDIT REPORTING COMPANY RECORDS. One of the three national credit reporting companies provided the Federal Reserve with the full credit records (with the exception of personal and creditor identifying information) of a nationally represen- tative sample of individuals as of June 1999. [note: 11]. Most credit and other records contained in the credit reporting company files of individuals are common to the three national compa- nies, which have adopted common standards for the reporting and coding of information provided by creditors and others. Nonetheless, some differences remain across companies. Some small institutions do not report to all three companies, and coverage of public records may not be identical. Moreover, differences can arise because of the timing of the receipt and processing of information at each company within a typical reporting cycle. Finally, rules regarding the linkage of reports to a common individual and the treatment of items such as noncurrent data can vary across credit reporting companies. [end of note.] Approximately 248,000 individuals included in the database of the national credit reporting company were randomly selected (table 1). [note: 12]. This sample consists of approximately 1 file out of every 657 files from the reporting company; the sampling frame excludes non- individual accounts, such as small business accounts, and records of deceased persons. [end of note.] The credit report- ing company then provided the Board with the entire credit record of each of these individuals, excluding any identifying information. Each con- sumer credit record contained possibly more than 350 variables that described consumer credit usage and performance. Table 1. Individuals with credit reporting company records, by type of information Type of information Number Share of sample (percent) Sample size 248,027 100.0 Credit account 216,202 87.2 Open and active account (note 1) 198,399 80.0 No active account 12,637 5.1 Authorized user only (note 2) 5,166 2.1 Public record 30,478 12.3 Collection agency account 74,888 30.2 Inquiry (note 3) 142,905 57.6 None of the above 318 .1 MEMO: Credit account only 63,674 25.7 MEMO: Public record only 42 * MEMO: Collection agency account only 25,905 10.6 MEMO: Inquiry only (note 3) 55 * Credit account and: Public record 28,534 11.5 Credit account and:Collection agency account 46,496 17.5 Credit account and:Inquiry (note 3) 138,584 55.9 1 = Active accounts are those used within one year of the date the sample was drawn. 2.= Individuals who are authorized to use an account but not legally responsible for its payment. Generally, these accounts will not be used in a credit evaluation of the authorized user. 3.= Includes only inquiries made within two years of the date the sample was drawn. * = Less than 0.5 percent. The sample contains information on about 2.58 million credit accounts, a number that, by the authors' estimate, translates into approximately 1.43 billion credit accounts in the credit reporting company's full database (table 2, memo item). The authors estimate the aggregate balances owed on the credit accounts in the full database to have been $6.7 trillion as of June 30, 1999. Credit accounts were reported by thousands of organizations, includ- ing more than 23,000 creditors reporting currently (those providing data at the time the sample was drawn). Individuals have credit reporting company records for a number of reasons: having a record of a credit account (whether open and active or not), being an authorized user on a credit account, having a money-related public record, having a record of a collection action, or having had an inquiry about their credit circumstances. Approximately 87 percent of individuals in the sample had a record of a credit account, and 92 percent of these had an open and active account as of the date the sample was drawn (table 1). A very small share of the individuals in the sample had only a public record item or an inquiry. However, about 11 percent of the sample had a credit reporting company record only because of a collec- tion action. The following discussion highlights the contents and scope of the data in the sample. A close examina- tion of the data reveals that the information is not complete in all regards and at times contains dupli- cations and ambiguities. These omissions and limita- tions may require users of the information to make assumptions about how to treat certain reported items in developing a credit profile for a consumer. The following discussion reviews the more important of these issues and quantifies their scope. Because th information is now somewhat dated, some of the patterns presented here may not reflect current circumstances. Table 2. All credit accounts and balances, grouped by status and distributed by account characteristic Percent except as noted Account characteristic All accounts: share having characteristic account status: currently reported: Open Share having characteristic Account status: Currently reported: Open Share of characteristic Account status: Currently reported: closed: Share having characteristic Account status: Currently reported: Closed: Share of characteristic Account status: Not Currently reported: Dormant(zero balance): Share having characteristic Account status: Not currently reported: Dormant (zero balance): Share of characteristic Account status: Not currently reported: Unknown (positive or unknown balance) Share having characteristic Account status: Not currently reported: Unknown (positive or unknown balance) Share of characteristic Type of credit: Revolving 62.7 71.2 36.1 44.3 29.9 95.4 27.6 51.5 6.4 Type of credit:Check credit 1.8 1.9 35.2 1.3 30.9 2.6 27.3 1.5 6.7 Type of credit:Banking institution 30.5 38.0 39.6 29.1 40.2 25.1 14.9 20.8 5.3 Type of credit:Finance company or credit union 4.7 4.4 29.3 3.1 27.5 9.6 36.7 3.9 6.4 Type of credit:Retailer 23.8 24.8 33.2 10.1 17.9 53.8 41.1 23.7 7.7 Type of credit:Other1 1.9 2.1 28.5 1.9 34.4 1.8 13.8 7.0 23.3 Type of credit:Nonrevolving 4.7 4.1 27.9 4.0 36.4 4.6 18.0 10.7 17.8 Type of credit:Installment 26.6 19.0 22.7 43.7 69.6 .0 .0 26.3 7.7 Type of credit:Mortgage 6.1 5.7 29.9 7.9 55.4 .0 .0 11.5 14.7 All accounts 100.0 100.0 31.8 100.0 42.3 100.0 18.2 100.0 7.8 MEMO: Percent of revolving accounts missing credit limit 34.9 32.3 49.3 .0 .0 39.2 45.8 28.6 4.8 Holder: Single 78.9 80.0 32.3 74.8 40.2 85.3 19.6 81.0 8.0 Holder: Joint 21.1 20.0 30.1 25.2 50.4 14.7 12.6 19.0 7.0 Creditor: Banking institution 44.7 48.2 34.3 51.4 48.6 27.2 11.0 35.3 6.1 Creditor: Finance company or credit union 19.8 14.9 24.0 26.9 57.7 10.2 9.4 22.9 9.0 Creditor: Retailer 24.8 25.0 32.1 12.1 20.7 54.1 39.7 24.2 7.6 Creditor: Other1 10.7 11.9 35.1 9.6 37.8 8.6 14.4 17.6 12.7 Date opened: Less than 1 year 8.1 19.6 77.0 1.9 10.0 3.2 7.2 6.1 5.8 Date opened: 1 to 2 years 9.3 16.0 54.7 5.5 24.8 5.8 11.3 11.0 9.2 Date opened: 2 to 4 years 19.3 21.9 36.2 18.3 40.2 14.7 13.9 24.2 9.7 Date opened: More than 4 years 63.4 42.5 21.3 74.3 49.7 76.3 21.9 58.7 7.2 Date last had balance: Current 31.0 67.1 68.7 4.6 6.3 .0 .0 100.0 25.0 Date last had balance: Less than 1 year 13.8 17.3 39.8 13.6 41.6 14.2 18.6 .0 .0 Date last had balance: 1 to 2 years 10.4 6.1 18.7 14.9 60.8 11.7 20.5 .0 .0 Date last had balance: 2 to 4 years 16.7 5.9 11.2 24.8 63.1 23.6 25.7 .0 .0 Date last had balance: More than 4 years 28.1 3.6 4.1 42.0 63.3 50.5 32.6 .0 .0 Date last reported: Less than 2 months 39.8 100.0 80.0 18.8 20.0 .0 .0 .0 .0 Date last reported: 2 months to 1 year 15.5 .0 .0 14.8 40.3 25.9 30.3 59.1 29.5 Date last reported: 1 to 2 years 8.9 .0 .0 12.9 61.5 12.1 24.7 15.9 13.8 Date last reported: 2 to 4 years 13.8 .0 .0 20.6 62.9 22.4 29.4 13.7 7.7 Date last reported: More than 4 years 22.0 .0 .0 32.9 63.3 39.7 32.7 11.3 4.0 Payment status 2 Worst recorded: Major derogatory 7.8 3.1 12.8 9.2 50.0 1.4 3.2 34.1 34.0 Payment status 2 Worst recorded:Minor derogatory 7.0 8.0 36.7 6.5 39.2 4.9 12.7 10.2 11.4 Payment status 2 Worst recorded:No derogatory 85.3 88.8 33.1 84.4 41.9 93.8 20.0 55.6 5.1 At most-recent report: Balance remaining/ balance unknown: Major derogatory 4.3 2.1 15.1 2.7 26.3 .0 .0 32.5 58.5 At most-recent report Balance remaining/ balance unknown:Minor derogatory 1.0 1.6 50.7 .3 12.9 .0 .0 4.8 36.4 At most-recent report Balance remaining/ balance unknown:No derogatory 25.7 63.5 78.4 1.6 2.7 * * 62.7 18.9 At most-recent report:No balance 68.9 32.8 15.1 95.4 58.5 100.0 26.3 .0 .0 MEMO:3 Number of accounts (millions) 1,428 454 . . . 604 . . . 259 . . . 111 . . . MEMO:Percent of dollars 100.0 . . . 71.8 . . . 1.2 . . . .0 . . . 27.0 NOTE. Here and in subsequent tables, data are a statistically representative sample of a national credit reporting company's credit record data as of June 30, 1999; items may not sum to 100 because of rounding. 1.= Includes national oil and gas companies, travel and entertainment com- panies, utility companies, real estate firms, government entities, and smaller retailers. 2.= A minor derogatory status is a payment delinquency of 30 days to 119 days. A major derogatory status is a delinquency o f 1 2 0 days or more, a payment plan, repossession, charge-off, collection action, bankruptcy, fore- closure, or adverse judgment by a court. 3.= National estimates based on the sample. . . . = Not applicable. * = Less than 0.05 percent. SOURCE. Here and in subsequent tables, author calculations using statisti- cally representative sample provided to the Federal Reserve Board by one of the three national credit reporting companies. Personal Identifying Information. All credit reporting company files include personal identifying information that allows the companies to distinguish among individuals and construct a full record of each consumer's credit-related activi- ties. Files always include the consumer's name (and known aliases), current and previous addresses, and social security number. Other identifying informa- tion sometimes found in credit files includes date of birth, telephone number(s), spouse's name, number of dependents, income, and employment informa- tion. [note: 13]. For further details, see "Consumer Information'' on the web site of the Consumer Data Industry Association, www.cdiaoline.org. [end of note.] These data are most often supplied by credi- tors; they are taken from credit application files. Information about an individual's lifestyle (for exam- ple, sexual orientation) or personal characteristics (for example, race or national origin) are excluded from credit reporting company files. One of the challenges that credit reporting compa- nies face is constructing a unified credit record for a consumer. This challenge arises for a number of reasons. An individual's social security number, for example, may be recorded incorrectly on a loan appli- cation, or it may be transmitted incorrectly to the credit reporting companies. Problems also arise because the identifying information may not be cur- rent or because a consumer may have accounts under different names or addresses. For instance, a con- sumer may be inconsistent in using a full name in all applications for credit or may change names, perhaps after a marriage or divorce. Furthermore, accounts may be difficult to link to a given consumer if the consumer's address has changed. Credit reporting companies have established a series of protocols to address each of these challenges. Credit Account Information. Credit accounts constitute the bulk of the information in the typical individual's credit record, and thus the information on credit accounts represents the major- ity of the information maintained by credit report- ing companies. Credit account records contain many details about each account (see box '' Credit Account Records''). Account Status. A basic element of credit reporting company data is information on the status of each account with respect to whether the credit relationship is ongoing (an ''open account'') or whether the account is closed and cannot be added to by the consumer. Determin- ing whether an account is open or closed is not always straightforward, in part because some credi- tors do not report all account closures to the credit reporting companies. Instead, in many situations, creditors simply stop reporting any information about an account, creating uncertainty about the current status of the account. These ''not currently reported'' accounts constitute a significant portion of all accounts in the credit reporting company data. For the discussion that follows, credit accounts are grouped according to their status and whether or not they are currently reported. An account is currently reported if either (1) its status had been reported to the credit reporting company within two months of the date that the sample of credit records was drawn or (2) it was last reported (at any time) to be closed and had a zero balance at the date of last report. All installment and mortgage accounts paid down to a zero balance are treated as currently reported and closed. With these definitions, accounts fall into one of four mutually exclusive groups, two of which are currently reported and two not currently reported. • Open credit accounts are currently reported and are not reported as closed. These include accounts that a consumer can use to incur additional debt, such as an open-end revolving account, and closed-end accounts that the consumer is paying down on a scheduled basis, such as a mortgage or an installment loan. • Closed credit accounts are currently reported (as defined here) and are reported as closed. Closed accounts cannot be used to incur additional debt. Virtually all these accounts have been fully repaid and have a zero balance, although a positive balance remains on a small number of closed revolving accounts. • Dormant accounts are non-installment, nonmort- gage accounts that were last reported as open with no outstanding balance but for which the last reporting was more than two months before the sample was drawn. These accounts are inactive, but from the data, one cannot determine whether they are open or closed. • An unknown accounts category contains all other accounts that are not currently reported. All these accounts were reported as having a balance at their last reporting date. The category includes installment, mortgage, and to a smaller extent, revolving accounts Payment Status and Balances Owed. The credit account records include information on the extent of consumer payment problems and the amount owed on an account. Nearly 70 percent of all accounts and 33 percent of accounts currently reported as open showed no outstanding balance at the time of most recent reporting. Among accounts with balances, more than one-fourth of the balance dollars at last date of reporting were associated with accounts in the ''unknown'' category (table 2, last row). The large share of outstanding balances that fell in the unknown category highlights the impor- tance of decisions about how to treat accounts in this category when using the data for credit evaluations or other purposes. With respect to payment performance, accounts were sorted into one of three categories: accounts with no ''derogatory'' (no record of late payment), those with evidence of a ''minor derogatory'' (a late payment of 30-59, 60-89, or 90-119 days), and those with evidence of a ''major derogatory.'' Credit accounts categorized as major derogatory include any account that is delinquent 120 days or more and all credit accounts reported as associated with bank- ruptcy, foreclosure, repossession, civil judgment, col- lection, charge-off, and so forth. [note: 15]. Regulatory guidance for banking institutions requires that closed-end loans, such as installment loans, must be charged off after 120 days of delinquency. Open-end loans are required to be charged off after being delinquent 180 days or more. See Federal Reserve Board Supervisory Letter SR 99-5, February 18, 1999. [end of note.] The analysis presents two ways of describing pay- ment history. First, accounts are sorted by their worst recorded payment problem. Second, accounts are sorted by their payment status at the time the credit reporting company last received information on the account (their ''status at most-recent report''). As discussed below, both worst payment problem and status at most-recent report are weighed heavily by creditors when conducting credit evaluations. Worst payment problem. More than 85 percent of all accounts had no record of a payment problem. The remaining accounts were split about evenly between those with, at worst, a minor derogatory and those with a major derogatory. Patterns differ sharply between open and closed accounts. Only about 3 per- cent of open accounts had a major derogatory status, whereas 9 percent of closed accounts had this status. This difference results from the general industry practice of closing accounts that experience severe payment problems. More than one-third of the accounts that had a major derogatory were not cur- rently reported and were last reported with a positive or unknown balance. Status at most-recent report. About 5 percent of all accounts were reported as having payment problems at the time of the most-recent reporting; most of the accounts with payment problems were reported as having a major derogatory. The incidence of accounts exhibiting a major derogatory at last report differs from that of accounts that ever exhibited a major derogatory because more than half the accounts with a historic major derogatory had been closed and showed a zero balance. Interpreting the Credit Account Data. As the preceding discussion highlights, credit report- ing company data provide a wide-ranging and com- prehensive picture of accounts that reflects individu- als' experiences with credit. However, the discussion also reveals that, in some instances, the data are not sufficiently up-to-date or complete to permit a clear understanding of an account's current status. The following sections present a more detailed look at the information in the credit reporting company files, focusing on items most pertinent to credit evaluation. [note: 16]. Credit evaluation is the most prominent use of the data, and the original motivation for its collection, but other uses of the data exist and may emphasize different items. [end of note.] Credit evaluators rely on a number of factors in assessing the credit quality of individuals. The exact weight attached to specific factors varies across evaluators and their different models, but the factors generally fall in three broad areas: the level of a consumer's indebtedness, the payment history, and credit account characteristics. [note: 17]. For a more detailed discussion of factors considered in credit evaluation, including the relative weights given to different factors, see the description on the web site of Fair Isaac and Company, www.myfico.com. Also see Avery et al., ' 'Credit Risk, Credit Scoring, and the Performance of Home Mortgages.'' [end of note.] Level of Consumer Indebtedness. When evaluating credit, creditors consider the type and amount of debt a consumer has and the propor- tion of available credit he or she has in use (credit utilization). For revolving accounts, credit utilization is measured as the proportion of available credit in use (outstanding balance divided by credit limit). For mortgage and installment accounts, credit utilization is generally measured as the proportion of the origi- nal loan amount that is unpaid, referred to here as the paydown rate. Fundamental to measuring consumer indebtedness is deciding which accounts to treat as active—that is, installment and mortgage accounts with positive bal- ances and revolving accounts upon which consumers can draw. Clearly, credit evaluators would include currently reported open accounts as active in any calculations. The difficulty, however, is in determin- ing how to treat accounts that are in the dormant and unknown categories. The dormant category likely includes many accounts that are not currently reported but can be further drawn upon by the con- sumer. For example, some creditors do not provide updates for accounts that have a zero balance and no recent activity. The unknown category also likely includes some accounts that are still active. For the present analysis of consumer indebtedness, the definition of ''active'' includes currently reported open accounts as well as dormant revolving accounts that were last reported within the year before the date the sample was drawn. Discussions with industry professionals, however, indicate that there is no strict rule regarding a single appropriate choice of time period cutoff. The choice of the cutoff affects the number of accounts deemed to be active and the potential borrowing capacity of an individual but has no bearing on the amounts owed because all the dormant accounts had zero balances at the time of last report. For reasons discussed below, this study includes no accounts from the unknown category, which are believed most likely to be closed. Outstanding balances. Most consumer indebtedness on active accounts involves mortgages. Mortgages represented about 67 percent of the dollars outstand- ing but only 5 percent of the active credit accounts (table 3). Table 3. Open accounts and balances, by type of account Percent except as noted Type of account Accounts Share of account type counts Share of all open accounts 0 Distri 1 - 249 bution of 250- 499 balances, 500- 999 by dollar 1,000- 4,999 size of b 5,000- 9,999 alance 10,000- 99,999 100,000 or more Dollar size of balance, accounts with a balance1 Mean Dollar size of balance, accounts with a balance1 Median Dollar-weighted balances Share of account type Dollar-weighted balances Share of all open accounts Revolving: 100.0 74.3 53.0 14.6 7.1 6.8 13.5 3.7 1.2 * 2,015 595 100.0 11.3 Revolving:Check credit 2.5 1.9 51.2 5.4 4.9 5.3 14.3 6.2 12.3 .3 9,736 2,934 12.8 1.4 Revolving:Banking institution 49.9 37.0 40.6 13.4 7.6 8.4 21.6 6.7 1.7 * 2,370 1,022 74.2 8.4 Revolving:Finance company or credit union 6.3 4.7 39.8 17.6 8.9 10.3 18.7 3.0 1.6 * 1,887 645 7.6 .9 Revolving:Retailer 37.9 28.1 70.5 16.8 6.3 4.0 2.3 .1 .0 .0 378 201 4.5 .5 Revolving:Other2 3.4 2.5 66.0 9.8 6.9 7.6 9.5 .2 * .0 847 513 1.0 .1 Nonrevolving 100.0 4.2 48.4 34.3 5.2 4.1 5.2 1.3 1.4 * 1,227 107 100.0 .4 Installment: 100.0 16.5 .4 3.7 4.0 7.5 38.1 20.1 25.8 .3 8,256 4,354 100.0 21.8 Banking institution 30.5 5.1 .1 1.5 2.2 4.6 32.2 24.7 34.1 .7 11,077 6,697 41.1 8.9 Installment:Auto credit 11.3 1.9 * .8 1.3 2.4 22.4 30.7 42.4 .1 10,005 8,743 13.8 3.0 Installment:Finance company or credit union 22.6 3.7 .1 1.9 2.4 4.2 25.3 24.7 41.3 .2 10,366 8,225 28.5 6.2 Auto credit 16.4 2.7 * 1.1 1.2 2.1 19.8 27.3 48.6 * 10,973 9,745 21.9 4.8 Retailer and other 2 46.9 7.8 .8 6.0 6.0 11.0 48.2 14.8 13.0 .2 5,384 2,620 30.5 6.6 Mortgages 100.0 5.0 * .2 .1 .2 2.2 3.2 64.2 29.9 83,699 68,000 100.0 66.5 All open accounts 100.0 100.0 41.5 12.9 6.1 6.5 16.7 6.3 8.4 1.6 10,678 1,483 100.0 100.0 MEMO Closed accounts with positive balances Currently reported 100.0 . . . .0 20.2 16.5 18.3 34.3 8.4 2.3 * 2,010 822 100.0 . . . Not currently reported 100.0 . . . .0 20.0 10.3 12.4 31.1 9.4 14.1 2.8 11,357 1,455 100.0 . . . NOTE. Excludes accounts in a major derogatory status (for definition, see . . . Not applicable table 2, note 2). * Less than 0.05 percent. 1. Excludes accounts in dispute. 2. ' 'Other' ' includes national oil and gas companies, travel and entertain- ment companies, utility companies, real estate firms, government entities, and smaller retailers. Nearly 30 percent of all active mortgages in the data had outstanding balances of $100,000 or more. Installment accounts, accounting for about 22 percent of the balances, involved the second larg- est proportion of all consumer debt. Installment accounts also tended to be relatively large; 46 percent had balances of $5,000 or more. In contrast, revolv- ing accounts represented a relatively small share of outstanding balances (11 percent), even though they were by far the largest proportion of active accounts measured by number. This difference arises because more than half of all revolving accounts had zero balances and many accounts had relatively small credit limits, effectively restricting the amounts a consumer could borrow. Among the types of revolv- ing accounts, those issued by retailers are the most likely to show a zero balance. The large share of revolving accounts that showed a zero balance at last report is not surprising. The use of credit cards varies greatly because some cards are unused for a period of time whereas others are used regularly either as a convenient means of payment or a source of credit. Whether a card is reported as having a balance is not an indicator of whether the card is being used to borrow for an extended period or is being used simply as a convenient payment device. Even when a consumer pays the full balance billed each month on a card used regularly, the credit report is likely to show a balance due. Such a balance appears because payments are not received and cred- ited immediately and additional charges are likely to be made between the date the last bill was generated and the date that balance information is sent to the credit reporting company. Credit limits. To calculate a utilization rate for a revolving account, one must have information on both an account's outstanding balance and its credit limit. The credit limit, however, is not regularly reported for all accounts. Approximately one-third of all active revolving accounts in the sample lacked such information (table 4A). [note: 18]. The incidence of missing credit limits is significantly lower in credit reporting company data at present. According to industry esti- mates, credit limits are currently missing on about 13 percent of revolving accounts. The higher incidence of missing limits in the sample may stem from a period when a few large creditors decided to suspend reporting of this item for competitive reasons. Pressure from financial institution regulators and the credit reporting companies appears to have convinced these creditors to resume reporting credit limits. See Robert M. Hunt, "The Development and Regulation of Consumer Credit Reporting in America,'' Federal Reserve Bank of Philadelphia, Working Paper no. 02-21, November 2002. [end of note.] Table 4. Borrowing capacity on open accounts Percent except as noted A. Credit limits reported Type of account Share of account type having credit limit reported Mean credit limit (dollars) Median credit limit (dollars) Distribution of accounts by dollar size of credit limit: 1 - 499 Distribution of accounts by dollar size of credit limit: 5 0 0 - 999 Distribution of accounts by dollar size of credit limit: 1,000- 4,999 Distribution f accounts by dollar size of credit limit: 5 ,000- 9,999 Distribution of accounts by dollar size of credit limit: 10,000- 24,999 Distribution of accounts by dollar size of credit limit: 25,000 or more Revolving 67.5 4,534 2,500 8.5 16.3 40.5 22.4 11.0 1.3 Check credit 84.3 12,002 3,500 6.1 12.2 35.6 15.5 15.5 15.1 Banking institution 60.1 7,036 6,000 3.1 5.4 27.8 39.5 22.4 1.8 Finance company or credit union 88.4 3,467 2,500 4.5 10.5 60.9 19.2 4.4 .5 Retailer 71.9 1,575 1,000 15.9 30.3 47.8 5.6 .4 * Other(note 1) 74.5 2,808 2,500 3.2 11.3 71.6 13.0 1.0 * Installment 99.5 11,152 7,060 2.6 4.3 33.9 18.5 32.6 8.3 Mortgages 99.6 92,797 75,400 * * .3 .9 7.7 91.1 For these accounts, other techniques are required to estimate a utilization rate. The most common approach in these circum- stances is to use the highest balance ever reported on the account (either the current balance or the historic high balance) as a surrogate for the credit limit. As described below, this alternative approach creates very different profiles regarding the extent to which revolving accounts have been drawn on. For mortgages and installment loans, the credit limit and the high balance (the original amount borrowed) are the same, and so the profiles will be identical. Credit limits on revolving accounts are not typi- cally very large. About 25 percent of the sample accounts meeting the authors' definition of active had limits under $1,000, and about 41 percent had credit limits in the $1,000 to $4,999 range (table 4A). Only a very small proportion of revolving accounts had limits of $25,000 or more. [note: 19]. The data also indicate that within the broad revolving account category used here, check credit accounts have, on av rage, much higher credit limits than other types of revolving accounts. The average credit limit for active check credit accounts reporting a limit was about $12,000 compared with an average of $4,500 for all types of revolving accounts. The relatively high credit limits for check credit accounts may reflect the inclusion of some home-secured loans in that category. So-called home equity lines of credit typically involve relatively high credit limits because their credit risk is miti- gated by the security offered by the account holder. By contrast, mortgages and, to a lesser degree, installment loans had much higher credit limits (original balances). More than 90 percent of the mortgage accounts had original balances over $25,000, and 41 percent of installment loans had original balances of $10,000 or more. Using data from the sample, one can also profile the distribution of credit limits across different types of creditors. For example, the average credit limit for revolving accounts from all sources was approxi- mately $4,500. Credit limits for revolving accounts tended to be highest at banking institutions, at about $7,000, and lowest among retailers, at about $1,600. ing loans and any evidence of money-related pub- lic actions or non-credit-related collections. Credit evaluators consider whether a consumer has a history of repaying balances on credit accounts in a timely fashion. Such an analysis considers not only the frequency of any repayment problems but also their severity (how late), recency, and dollar magnitude. Repayment performance is evaluated on the full range of accounts that a consumer holds, spanning accounts that vary by type of account and type of creditor. This section profiles the credit reporting company data on payment history on credit accounts; later sections present data on public records and collection actions on non-credit-related bills. In assessing the credit circumstances of an indi- vidual, creditors often look at both the consumer's recent payment experience on credit accounts and his or her record of payments over a much longer period. [note: 23]. A s n o t e d , t h e Fa i r C r e d i t R e p o r t i n g A c t spec i f i e s t h a t c o n s u m e r c red i t r e p o r t s c a n n o t i n c l u d e a n y a d v e r s e i t e m o f i n f o r m a t i o n t h a t is m o r e t h a n s e v e n y e a r s o ld u n l e s s it i n v o l v e s a b a n k r u p t c y ( w h i c h h a s a t e n - y e a r l imi t ) , c r i m i n a l c o n v i c t i o n ( n o t i m e l imi t ) , o r o n e of a f e w o t h e r n a r r o w e x c e p t i o n s ( see b o x " A S u m m a r y of C o n s u m e r R i g h t s u n d e r t h e Fa i r C r e d i t R e p o r t i n g A c t ' ' ) . [end of note.] In general, an individual with a major derogatory will find qualifying for new credit diffi- cult, may face high interest rates for the credit received, or may be limited in further borrowing on existing open accounts. In addition, creditors typi- cally close an account that is associated with a major derogatory, effectively preventing the consumer from adding new debt to that account. The payment perfor- mance profiles obtained from the data are influenced both by consumers' behavior regarding their accounts and by the reporting practices of creditors. Worst payment status recorded. Credit payment history can be evaluated by focusing on the worst derogatory status recorded for an account, that is, on the most severe problem in an account. About 85 percent of revolving accounts and of installment accounts showed no record of a delinquent payment or of a major derogatory (table 6). Table 6. All credit accounts and recently opened accounts, by worst payment status recorded Percent Type of account All accounts: No deroga- tory All Accounts: Minor derogatory (days delinquent): 30-59 All Accounts: Minor derogatory (day delinquent) 60-89 All Accounts: Minor derogatory (days delinquent) 90-119 All Accounts: Major derogatory: 120-149 days delin- quent All Accounts: Major derogatory: Other All Accounts: Total Recently Opened accounts: No deroga- tory Recently opened Accounts: Minor derogatory (days delinquent): 30-59 Recently opened Accounts: Minor derogatory (days deli quent): 60-89 Recently opened Accounts: Minor derogatory (days delinquent): 90-119 Recently ope ed Accounts: Major derogatory: 120-149 days delin- quent Recently opened Accounts: Major derogatory: Other Recently opened accounts: Total Revolving 85.6 4.6 1.8 .8 1.2 6.0 100.0 92.5 3.1 1.2 .6 .7 1.9 100.0 Check credit 90.0 3.5 1.1 .6 .7 4.2 100.0 94.9 2.5 .6 .4 .3 1.4 100.0 Banking institution 86.1 4.3 1.7 .7 1.0 6.3 100.0 91.9 3.3 1.4 .6 .8 2.1 100.0 Finance company or credit union 86.5 5.5 1.8 .9 1.4 3.9 100.0 94.0 3.0 .9 .4 .6 1.0 100.0 Retailer 84.7 5.0 2.0 1.0 1.4 5.9 100.0 92.8 3.0 1.0 .6 .7 1.8 100.0 Other(note 1) 83.4 4.6 1.7 .9 1.4 8.0 100.0 94.0 2.7 .8 .4 .5 1.7 100.0 Nonrevolving 72.6 2.2 1.5 1.1 2.9 19.7 100.0 64.1 2.5 1.7 1.3 2.5 27.9 100.0 Installment 85.3 4.3 1.6 1.0 1.7 6.1 100.0 90.1 3.4 1.1 .7 .9 3.8 100.0 Banking institution 90.3 4.0 1.4 .6 .7 3.0 100.0 94.0 3.0 .9 .3 .3 1.5 100.0 Finance company or credit union 87.4 6.1 1.4 .4 .6 4.2 100.0 93.9 3.5 .8 .2 .3 1.2 100.0 Retailer and other(note 1) 79.7 3.5 1.8 1.7 3.3 9.9 100.0 85.3 3.6 1.5 1.1 1.7 6.9 100.0 Mortgages 91.0 4.3 1.4 .7 .8 1.9 100.0 96.2 2.3 .5 .2 .2 .6 100.0 All accounts 85.3 4.4 1.7 .9 1.4 6.4 100.0 90.9 3.1 1.1 .6 .8 3.4 100.0 1. = '' Other' ' includes national oil and gas companies, travel and entertain- ment companies, utility companies, real estate firms, government entities, and smaller retailers. Mortgages showed fewer problems, with 91 percent of these accounts showing no evidence of payment problems. This large proportion may reflect the high priority that consumers place on meeting payment obligations secured by their homes. Nonrevolving accounts were most likely to have experienced a major derogatory; however, the high incidence of major derogatories among nonrevolving accounts may be due not to poorer consumer performance but rather to the non- reporting of accounts with no major problems. Among all installment accounts, a little more than half of those evidencing a payment problem involved a major derogatory. In contrast, only about 30 per- cent of mortgages with a payment problem involved a major derogatory, while nearly all payment prob- lems among nonrevolving accounts involved a major derogatory. About 91 percent of recently opened accounts showed no record of delinquent payments or of a major derogatory. Such performance might be expected, in part because payment problems take time to emerge as consumers encounter adverse changes in their employment or personal circum- stances (for example, health problems or marital dif- ficulties). Although the incidence of any problem is lower for recently opened accounts than for others, the likelihood that a minor delinquency deteriorates into a major derogatory is about the same as for all accounts. Among the recently opened accounts, mort- gages again evidenced the fewest problems, with 96 percent of these accounts showing no payment problems. Payment status at most-recent report. This section details the distribution of all accounts according to their most-recent reported payment performance when the sample was drawn. This measure is the last status for the account reported by the creditor. Thus, for accounts not currently reported, this status may have changed but not have been reported by the time the sample was drawn. The proportion of accounts experiencing current payment problems is much lower than the proportion of accounts ever having a payment problem (compare table 7 with table 6). This difference arises because many accounts experiencing payment problems ''cure''—that is, regain nonderogatory payment sta- tus (most of these end up as closed accounts with zero balances). Table 7. All credit accounts, distributed by payment status at most-recent report Percent Type of account No derogatory (account status) Closed, no balance No derogatory (account status) Open, no balance No derogatory (account status) Open, positive balance Minor derogatory (d ys delinquent): 30-59 Minor derogatory (days delinquent): 60-89 Minor derogatory (days delinquent): 90-119 Major derogatory: 120-149 days delinquent ajor atory: Other Total Revolving 47.7 22.9 24.8 .5 .3 .2 .4 3.2 100.0 Check credit 52.8 20.1 23.6 .3 .2 .2 .3 2.4 100.0 Banking institution 46.9 18.0 30.4 .5 .3 .2 .4 3.3 100.0 Finance company or credit union 56.4 14.5 25.3 .5 .3 .2 .5 2.4 100.0 Retailer 47.2 30.5 17.9 .4 .2 .2 .4 3.3 100.0 Other(note 1) 41.9 31.7 20.2 .6 .2 .2 .6 4.6 100.0 Nonrevolving 43.8 16.0 22.5 .5 .4 .4 1.8 14.6 100.0 Installment 69.6 .1 24.7 .6 .3 .2 .6 3.9 100.0 Banking institution 74.9 * 22.4 .5 .2 .1 .2 1.7 100.0 Finance company or credit union 70.6 * 25.6 .7 .2 .1 .2 2.7 100.0 Retailer and other(note 1) 64.5 .2 26.3 .6 .4 .4 1.1 6.6 100.0 Mortgages 55.4 * 42.6 .8 .3 .1 .4 .5 100.0 All accounts 53.8 15.1 25.7 .5 .3 .2 .5 3.8 100.0 1. = '' Other' ' includes national oil and gas companies, travel and entertain- ment companies, utility companies, real estate firms, government entities, and smaller retailers. * = Less than 0.05 percent. Account curing is particularly preva- lent among accounts with minor delinquencies, reflecting the fact that minor delinquency is a transi- tory state; the accounts either cure or deteriorate into a major derogatory. For example, only 0.5 per- cent of all accounts at the most-recent report were 30-59 days past due whereas more than 4 percent had a worst payment status of 30-59 days past due. When evaluating credit payment history, creditors consider the length of time since a currently non- derogatory account was last delinquent. Recent payment problems on an account generally weigh more heavily than problems further in the past. This concept is most relevant for active accounts. Among accounts that were active when the sample was drawn, 91 percent had never been delinquent (table 8). Among active accounts that had been delin- quent at some time but were not delinquent at last report, a little more than half were delinquent during the twelve-month period preceding the drawing of the sample. Current Status. The data presented in tables 3 through 8 reflect the status of accounts at the date of most-recent report- ing. A credit evaluator, however, is likely to be inter- ested in the current status of accounts—that is, the status at the time the credit evaluation is made. For currently reported accounts or for accounts that are closed or dormant, the account status at the date of last reporting will be the correct current status in virtually all cases. One exception occurs because of inconsistencies in the way creditors report account delinquencies. About 11 percent of active accounts were reported by creditors that did not report minor delinquencies for any accounts. An additional 12 per- cent were reported by creditors that did not report delinquencies of 30-59 days. Nonrevolving accounts were particularly likely to fall in these categories. No evidence indicates that these creditors do not update their accounts at the same rate as other creditors; instead, they appear to be reporting accounts as nondelinquent until the accounts reach a seri- ously delinquent status. Consequently, customers of these creditors tend to show a lower incidence of minor delinquencies than do the customers of other creditors. 8. Nonderogatory credit accounts, distributed by the length of time since last delinquency recorded Percent Type of account All nonderogatory accounts:Never All nonderogatory accounts: Unknown All nonderogatory accounts: 1 -12 months All nonderogatory accounts: 13-24 months All nonderogatory accounts: More than 24 months All nonderogatory accounts:Total Active nonderogatory accounts:Never Active nonderogatory accounts: Unknown Active nonderogatory accounts: 1 -12 months Active nonderogatory accounts: 13-24 months Active nonderogatory accounts: More than 24 months Active nonderogatory accounts:Total Revolving 89.8 3.3 2.7 1.5 2.8 100.0 91.1 .5 4.6 2.0 1.8 100.0 Check credit 93.2 2.4 1.6 .9 1.9 100.0 94.4 .3 2.9 1.3 1.1 100.0 Banking institution 90.4 3.6 2.7 1.3 2.0 100.0 91.9 .4 4.5 1.7 1.5 100.0 Finance company or credit union 89.9 2.8 2.3 1.5 3.5 100.0 90.3 1.0 4.8 2.0 2.0 100.0 Retailer 88.7 2.9 2.8 1.7 3.8 100.0 89.8 .6 4.9 2.4 2.3 100.0 Other(note 1) 88.9 3.9 2.9 1.7 2.6 100.0 91.4 .5 4.1 2.2 1.7 100.0 Nonrevolving 88.3 7.7 1.7 1.0 1.4 100.0 93.5 1.0 3.2 1.2 1.1 100.0 Installment 90.3 5.2 1.5 .8 2.1 100.0 91.8 1.1 4.6 1.6 1.0 100.0 Banking institution 92.9 3.9 1.2 .6 1.5 100.0 93.4 .7 3.9 1.3 .7 100.0 Finance company or credit union 90.9 3.4 1.7 1.0 3.0 100.0 92.3 .3 5.1 1.5 .8 100.0 Retailer and other(note 1) 87.6 7.5 1.7 1.0 2.2 100.0 90.3 1.8 4.8 1.8 1.2 100.0 Mortgages 92.8 2.7 1.6 .9 2.0 100.0 93.2 .4 3.2 1.4 1.8 100.0 All nonderogatory accounts 90.1 3.9 2.3 1.3 2.5 100.0 91.4 .6 4.5 1.8 1.7 100.0 1. = '' Other' ' includes national oil and gas companies, travel and entertain- ment companies, utility companies, real estate firms, government entities, and smaller retailers. For accounts in the ''unknown'' category, a much more serious question is whether or not the account status at the date of last reporting is the same as the account's correct current status. For this category, the creditor has not updated the account information for at least three months (and often much longer), and the account shows a positive balance, raising the likelihood that the status has changed since it was last reported. There is reason to believe that major derogatory accounts in the unknown category differ from others in their likelihood of a changed status; thus, they are discussed separately. Unknown category accounts not in major derogatory status. The current status of nonderogatory and minor derogatory accounts in the unknown category is likely to differ in most circumstances from that last reported. Since these accounts showed positive bal- ances at the date of last reporting (signifying that they were open), one can infer that their status had changed by the time the sample was drawn: Either the account was closed or transferred or the account holder made payments, and thus changed his or her balance, or did not make payments, in which case the performance status worsened. The most notable exception is for records of some types of student loans where repayment may be deferred for a period of time. About 67 percent of all accounts in the unknown category were not in major derogatory status at the date of last reporting. About two-thirds of these accounts were revolving or open non- revolving accounts. Most of these accounts require monthly payments, and thus it seems highly unlikely that their status at last report reflects their current circumstances. Recognizing the high likelihood that many noncur- rently reported accounts have had a change in status, the credit reporting companies have adopted ''stale account'' rules. The credit reporting company's rule in place at the time the sample was drawn was to define all revolving and nonrevolving accounts with positive balances and no major derogatories as stale if they had not been reported within six months. Stale accounts were treated as closed and were assigned a zero balance. The data reflect this rule. Sixty-one per- cent of the revolving and nonrevolving accounts in the unknown category had been reported within six months before the date the sample was drawn (and Public Records, Collections, and Inquiries. Besides credit account information, information derived from various public records, reports from collection agencies, and creditor inquiries about a consumer's credit history is included in credit report- ing company records (see box ''Non-Credit-Account Data Included in Credit Records''). Credit evaluators consider these types of information in assessing the credit quality of individuals. However, issues of miss- ing or ambiguous information complicate the use of these data. [beginning of box:] Non-Credit-Account Data Included in Credit Records Public Records Public records include information from public legal filings collected either directly by public institutions and provided to the credit reporting companies or recorded by third parties from public records. Public records include information on foreclosures, civil judgments, or tax liens reported for the consumer over the past seven years, and bankruptcies filed during the previous ten years. Informa- tion on each judgment, lien, or bankruptcy includes the following: • Date of the public record • Type of filing (tax lien, foreclosure, bankruptcy chapter) • Current status (filed, dismissed, paid, granted) • Amount of the claim (or assets and liabilities for bankruptcies) • Court docket number • Name of the plaintiff. Collection Account Records Collection account records consist of credit accounts and records of unpaid bills, such as bills for utility services, that have been transferred to a collection agency or are otherwise in the process of collection. Collection account records include the following information: • Date that the item was turned over to the collection agency • Date that the account information was recorded by the credit reporting company • Account status (paid or unpaid) • Amount currently owed as of the verification date (not applicable for paid accounts) • Collection agency's subscriber code • Name of the original creditor. Inquiry Records Inquiry records consist of information about the con- sumer requested by a creditor. Inquiry records are main- tained for two years and include the following: • Date of the inquiry • Type of credit being considered (missing for most inquiries) • Inquiry requestor's subscriber code. [end of box.] Public records. The types of public information available from gov- ernment entities include records of bankruptcy fil- ings, liens, judgments, and some foreclosures and lawsuits. The data regarding bankruptcy distinguish between the types of personal bankruptcies. The two main types of consumer bankruptcies are Chapter 7 and Chapter 13, each named after the chapter in the U.S. bankruptcy code that defines the nature of the proceedings. Chapter 7 provides for liquidation bank- ruptcies, which involve the liquidation of all non- exempt assets and the discharge of almost all debts. Chapter 13 provides for so-called wage-earner plans that involve the full or partial repayment of debts accounts, about 30 percent were two years old or less as of the date the sample was drawn, and 48 percent were more than four years old (table 9). Mortgage accounts tended to be somewhat younger than revolv- ing accounts, with about 40 percent two years old or less and 42 percent more than four years old. Install- ment accounts were the youngest overall—about 54 percent of these accounts were two years old or less—and nonrevolving the oldest, with 63 percent more than four years old. For closed and other accounts that were reported to have a zero balance as of their last date of report, the length of time since the account had a balance may be more pertinent, since to some degree this measure indicates the timeliness of information available from the account's payment history. Among accounts last reported to have a zero balance, revolving and non- revolving accounts tended to be paid down to zero more recently than installment accounts and mort- gages. For instance, 25 percent of revolving and nonrevolving accounts with a zero balance last had a positive balance within a year of the date the sample was drawn, compared with 11 percent of installment accounts and 16 percent of mortgages. About half of installment and mortgage accounts with a zero bal- ance last had a positive balance no less than four years before the date the sample was drawn, com- pared with about one-third of revolving accounts. while assets are shielded from creditor action. [note: 27]. O t h e r b a n k r u p t c y chap t e r s ava i l ab l e t o i n d i v i d u a l s , b u t r a r e l y u s e d b y t h e m , i n c l u d e C h a p t e r 1 1 a n d C h a p t e r 1 2 . F o r m o r e i n f o r m a - t i o n o n b a n k r u p t c y , see " B a n k r u p t c y B a s i c s , ' ' A d m i n i s t r a t i v e O f f i c e o f t h e U n i t e d Sta tes C o u r t s , J u n e 2000 . [end of note.] The data also distinguish (albeit imperfectly) between fed- eral, state, and local tax liens and other liens. Other- wise, unlike credit account data, the public record data do not provide a classification code for the type of creditor or plaintiff (for example, a provider of medical services or a utility company). However, by examining the names of plaintiffs, one can distin- guish among broad types of judgments and lawsuits, such as those related to unpaid bills for medical and utility services (again, imperfectly). Although public records include some details about the action, the information available is narrower in scope than that available on credit accounts. Overall, about 12 percent of the individuals in the credit reporting company data had at least one public record item (percentage derived from table 1), and almost 37 percent of the individuals with a public record item had more than one item noted. Judgments and liens, representing 40 percent and 34 percent of the public records respectively, were the two most common types of public record noted in the data sample (table 10). Bankruptcies accounted for nearly all the remaining public records. Most of the bank- ruptcy records were associated with Chapter 7 fil- ings, which is the most common type of personal bankruptcy. [note: 28]. A n d r e a S t o w e r s a n d M a r k C o l e , " A B a n k r u p t c y W a k e - U p Ca l l , ' ' Mortgage Banking, vo l . 57, n o . 5 ( F e b r u a r y 1997) , pp . 1 0 - 1 7 . [end of note.] Table 10. Public records, distributed by dollar amount of claim Percent Type of public record Memo: Distribution by record type Distribution of public records, by amount of claim (dollars)10 Distribution of public records, by amount of claim (dollars)1 1-250 Distribution of public records, by amount of claim (dollars)1 251-500 Distribution of public records, by amount of claim (dollars)1 501-1,000 Di tribution of public records, by amount of claim (dollars)1 1,001-5,000 Distribution of public records, by amount of claim (dollars)1 5,001-10,000 Distribution of public records, by amount of claim (dollars)1 10,001 or more Bankruptcy: 22.7 . . . . . . . . . . . . . . . . . . . . . Bankruptcy: Chapter 7 75.9 . . . . . . . . . . . . . . . . . . . . . Bankruptcy: Chapter 13 23.7 . . . . . . . . . . . . . . . . . . . . . Bankruptcy: Other .3 . . . . . . . . . . . . . . . . . . . . . Foreclosure .9 19.1 1.5 0 .3 4.2 1.8 73.2 Lien: 34.1 32.2 9.1 7.2 9.7 21.6 8.0 12.2 Lien: Federal government 28.3 20.0 .8 1.4 2.8 22.6 18.0 34.4 Lien: State government 65.9 36.3 12.5 9.5 12.5 21.3 4.2 3.7 Lien: Local government 5.3 48.6 10.1 8.3 10.3 19.9 1.8 1.0 Lien: Other 2 .5 7.4 20.4 11.4 16.5 28.4 11.9 4.0 Judgment: 39.7 15.8 12.2 13.6 17.1 32.3 5.9 3.1 Judgment: Medical 18.4 18.5 16.8 19.4 19.4 21.7 2.9 1.3 Judgment: Utility 3.1 17.6 17.9 16.4 22.3 22.4 2.2 1.2 Judgment: Government 5.1 15.1 19.2 13.7 14.2 26.6 7.0 4.2 Judgment: Collection agency 9.2 29.7 14.0 15.6 14.8 22.4 2.9 .6 Judgment: Creditor2 18.9 11.3 4.7 5.3 10.8 46.9 14.8 6.1 Judgment: Other3 45.4 13.8 12.0 14.0 19.3 33.8 2.9 .6 Lawsuit: 2.6 24.3 9.8 9.5 13.5 28.4 9.0 5.4 Lawsuit: Medical 17.7 30.1 15.2 11.8 16.5 19.6 4.7 2.0 Lawsuit: Utility 4.5 26.6 8.8 23.0 21.2 19.5 .9 .0 Lawsuit: Government 3.9 40.6 10.4 5.2 15.6 17.7 4.2 6.3 Lawsuit: Collection agency 5.7 16.8 24.5 10.5 16.1 18.9 10.5 2.8 Lawsuit: Creditor2 25.4 13.3 2.2 4.8 9.3 44.2 17.2 9.1 Lawsuit: Other3 42.9 27.4 9.9 10.0 13.3 26.4 7.3 5.7 All public records 4 76.4 23.4 10.7 10.6 13.7 27.4 7.0 7.2 1. = Public records with reported amounts equal to zero have been paid or dismissed. The original amounts involved in the public action are not included in the records. 2. = Includes large retailers, banking institutions, and finance companies. 3. = Includes small retailers, law firms, individuals, educational institutions. 4. = Excludes bankruptcy and foreclosure. . . . = Not applicable. Lawsuits and foreclosures accounted for small pro- portions of the public record actions included in the data because credit reporting companies choose to gather such information only in limited circum- stances. Underlying this decision for lawsuits is a belief that the simple filing of a lawsuit, which pre- cedes any decision on its merits, is of only limited value, particularly for credit evaluation. Moreover, as shown below, the degree to which lawsuits are reported is inconsistent. Credit reporting companies generally do not gather such information for fore- closures because most of them are believed to have already been reported in conjunction with credit accounts; thus, collecting them from public records would be redundant. The public records information was examined to determine the types of plaintiffs involved in these actions. Almost all the liens recorded in the data involved federal or state governmental entities; local governments and others accounted for only about 6 percent of the liens. For both judgments and law- suits, the most common types of plaintiffs were those in the ''other'' category (mostly smaller retailers and law firms), followed by creditors (large retailers, banking institutions, and finance companies) and pro- viders of medical services. A large proportion of the public record items asso- ciated with liens, judgments, and lawsuits showed relatively small balances owed (table 10). About one- quarter of these three types of public record items in the credit reporting company data showed no bal- ances owed, indicating that the legal action was either paid in full or resolved in some other manner. About 35 percent of the public records of these types showed an amount owed of $1,000 or less; about 7 percent involved actions seeking more than $10,000. Unlike the other types of public records (excluding bankruptcies), foreclosures typically showed large dollar amounts owed. While about one- fifth of the foreclosures showed no balances currently owed (the foreclosure action was either ''satisfied'' or ''dismissed''), nearly three-quarters involved bal- ances of $10,000 or more. In some cases, more than one public record item for an individual appears to be associated with a single episode. The reasons for several public record items resulting from a single episode are various. Failure to pay a bill may cause both a lawsuit and a judgment to appear in an individual's records. Several public records related to unpaid medical bills may stem from the same injury or illness. An appealed judgment or a refiling of a judgment in a different court may result in more than one record of a judgment. In addition, the records for an individual may show a state or local tax lien that has not been paid and a separate record of a paid tax lien of the same type, but these may or may not refer to the same original lien. To the extent that case identifiers (docket numbers) are available, credit reporting companies use them to update public record information. For example, if a tax lien is reported paid with the same docket number used for the original public record of the lien, the original record will be updated by showing the status as paid rather than by adding a new lien item to the consumer's record. Consistent case identifiers are not always available, however; for example, new docket numbers may be assigned when a judgment is appealed. In such circumstances, two or more distinct records for the same episode may appear in the data. Determining whether distinct public record items per- tain to the same episode is difficult. To shed light on this issue, the authors developed some rules of thumb to estimate the extent to which multiple public record items are related. In the case of public records associated with medical bills, for example, the authors considered all records that did not show a substantial gap between the dates of each record to be a single episode. In the case of bankrupt- cies, if a record of an initial filing under Chapter 13 was followed shortly thereafter by a filing under Chapter 7, both records were considered a single episode. The actual incidence of unique episodes may be higher or lower than these estimates. Excluding liens, the number of unique episodes is estimated to be about 90 percent of the total number of public records, with little variation across the types of public records. For liens, the number of unique episodes is estimated to be about two-thirds of the total number of public records of this type; but deter- mining what is a unique incident is more difficult. For example, multiple liens filed at the same time by the same type of governmental entity may be liens for the same tax year or pertain to different years. Patterns in the public records in the sample suggest some inconsistency in reporting across plaintiffs and geographic areas. For example, the inconsistent cap- turing of lawsuits is reflected in the sample by the fact that three states (Maryland, New York, and Penn- sylvania) accounted for two-thirds of all individuals with records of lawsuits. Inconsistencies can arise not only because of reporting practices but also because of the practices of specific plaintiffs. Some plaintiffs, for example, obtain separate judgments for individual unpaid billed items, whereas other plaintiffs in simi- lar circumstances may have combined the bills. Collection agency accounts. Information on non-credit-related bills in collection, such as those for unpaid medical services, is reported to credit reporting companies by collection agen- cies. In addition, collections on some credit-related accounts also are reported directly by collection agen- cies. In the latter case, the information is grouped with the collection actions on non-credit-related bills rather than with the credit account information. Over- all, about 31 percent of the individuals with credit reporting company records had at least one such collection action reported by a collection agency (derived from table 1). For about 10 percent of the individuals, the only record item in their credit report- ing company file was a collection agency action. Because collections are considered to be a type of major derogatory, they can have an important effect histories of at least some consumers. The following are four particular areas of concern: (1) credit limits are sometimes not reported; (2) the current status of accounts that show positive balances but are not currently reported is ambiguous; (3) some creditors fail to report nonderogatory accounts or minor delin- quencies; and (4) the reporting of data on collection agency and public record accounts is possibly incon- sistent and inquiry data is incomplete. Missing credit limits. A key measure used in credit evaluation—utilization—could not be correctly cal- culated for about one-third of the open revolving accounts in the sample because the creditor did not report the credit limit. About 70 percent of the consumers in the sample had a missing credit limit on one or more of their revolving accounts. If a credit limit for a credit account is not reported, credit evaluators must either ignore utilization (at least for accounts without limits) or use a substitute measure such as the highest-balance level. The authors' evaluation suggests that substituting the highest-balance level for the credit limit generally results in a higher estimate of credit utilization and probably a higher perceived level of credit risk for affected consumers. Accounts not currently reported. About 8 percent of all accounts in the sample showed positive balances but were not currently reported. Moreover, of those accounts reported as a major derogatory at the most- recent report, almost three-fifths were not currently reported. The authors' evaluation suggests that many of these accounts, particularly mortgages and install- ment loans, are likely to have been either closed or transferred but were not reported as such. Many of these accounts were reported by creditors that were not reporting data to the credit reporting company when the sample was drawn, and thus information on these accounts is unlikely to have been updated. The significant fraction of not currently reported accounts that are likely closed or transferred implies that some consumers will show higher current balances and a larger number of open accounts than they actually hold. Some of this overrepresentation is mitigated by credit evaluators' assumption that accounts unreported over a long period are closed. However, they may not make the assumption for derogatory accounts, thus penalizing consumers who have paid off a delinquent account since it was last reported. Failure to report nonderogatory accounts or minor delinquencies. Between 1 percent and 2 percent of the credit reporting company records were supplied by creditors that reported information only on credit accounts that had experienced payment problems. The evidence does not indicate that the accounts they did report were in error; however, the failure to report accounts in good standing likely affected the credit evaluation of consumers with such accounts. If con- sumers have low utilization of nonreported accounts, the failure to report may worsen their credit evalua- tion. For consumers having nonreported accounts with high utilization, however, the failure to report may actually improve their credit evaluation. The analysis further indicates that some creditors do not report that an account is experiencing a minor delin- quency. The credit histories for consumers with such accounts appear somewhat better than they actually are. Inconsistent reporting of public records, collection agency accounts, and inquiries. About 40 percent of the individuals with public records have more than one such record, and a similar percentage of those with accounts reported by collection agencies have more than one collection item. For many of these individuals, the multiple record items appear to per- tain to the same episode, such as one record filed when a collection action was initiated and a second record filed when it was paid. Evidence indicates that some inconsistencies arise in the reporting of actions across geographic areas or types of plaintiff. More- over, unlike the credit account data, no code identifies the type of creditor or plaintiff. These limitations of the data could significantly affect credit evaluation because more than 50 percent of the records of major derogatories in the credit files are collection agency reports or public records. Multiple inquiries in a consumer's credit file can arise either when the consumer shops among differ- ent creditors for the same loan or when he or she applies for multiple loans. Credit evaluators would like to distinguish between these different cir- cumstances because the latter may indicate financial distress, whereas the former would not. Although the presence of a code for loan type in the credit file's inquiry records holds the promise of dis- tinguishing between the circumstances, more fre- quent reporting by creditors is required for these codes to serve their purpose. Creditors failed to provide the code for 98 percent of the inquiry records in the data sample. In the absence of a loan-type code, proxies, such as the type of credi- tor, would have to be used to distinguish between shopping for a single loan and applying for multiple loans. Consequences of Data Limitations. The effect of these data limitations is twofold. First, because credit-scoring models are built using these data, ambiguities, duplications, and omissions will affect the model's assessments of risk factors. For example, if one cannot distinguish in the data between individuals who have a certain characteristic (say, an unpaid major derogatory) from those who appear to have that characteristic but actually do not (such as those with an unreported payoff), then the model will incorrectly assign a risk factor to the joint group that reflects their combined performance. Second, ambiguities, duplications, and omissions in credit files can result in an incorrect evaluation of the credit risk of individual applicants. These two effects are intertwined: Correcting one part without the other will not fully solve the problem. For example, resolv- ing the problems in applicant files will not correct the models if the models were developed using problem- atic data. Such limitations in credit reporting company records have the potential to both help and hurt individual consumers. On the one hand, consumers with positive account information, such as the payoff of a major derogatory, that creditors have not reported are hurt. On the other hand, consumers with negative information that is unreported, such as an unpaid medical bill that does not go to collection or an unreported minor delinquency on a credit account, are helped. Even consumers with no such problems in their files can be affected. For example, a con- sumer with an unpaid major derogatory that is cor- rectly reported will look the same as a consumer with a paid, but not updated, major derogatory. As a consequence, the former consumer will likely have a somewhat better credit evaluation, and the latter con- sumer a somewhat worse one, than he or she would if credit grantors (and the builders of the models they use) were better able to distinguish between paid and unpaid major derogatories. Consumers who are hurt by ambiguities, duplica- tions, and omissions in their files have an incentive to correct them, but consumers who are helped by such problems do not. The result of this difference may be an asymmetric correcting of files. Such asymmetry can lead to overall performance on loans that is somewhat worse than would be predicted by credit- scoring models. Possible Remedies. A remedy for many of these issues is consumer vigilance. Consumers can periodically review their credit reports and use the dispute process established in the FCRA to correct errors or omissions (see box ''How to Contact the National Credit Reporting Com- panies'' ). The FCRA generally provides that a con- sumer who is denied credit must be given the reasons for denial and an opportunity to receive a copy of his or her credit report without charge. Similarly, consumers seeking new credit are routinely advised to check their credit reports before applying. In addi- tion, when credit is underwritten, a loan officer some- times reviews the credit report information and thus may have an opportunity to see and correct data problems. [beginning of box:] How to Contact the National Credit Reporting Companies The following is the contact information for the three national credit reporting companies. Equifax P.O. Box 740241 Atlanta, GA 30374 (800) 685-1111 (order credit report) (888) 766-0008 (fraud alert) http://www.equifax.com Experian P.O. Box 2002 Allen, TX 75013 (888) 397-3742 (order credit report, disputing credit items, fraud alert, other questions) http://www.experian.com Trans Union Trans Union Consumer Relations P.O. Box 2000 Chester, PA 19022 (800)916-8800 To order a credit report: Trans Union LLC Consumer Disclosure Center P.O. Box 1000 Chester, PA 19022 http://www.transunion.com [end of box.] The extent to which the concerns noted above are likely to be addressed by individual consumers or loan officers checking credit reports is unclear. On the one hand, an unreported credit account, credit limit, or inquiry loan-type code may not be identified as an issue of concern. Moreover, the credit granting system has moved toward risk-based pricing in which applicants are less likely to be denied credit (and thus given the reasons for denial) than to receive credit at prices that reflect the perceived risk. Consumers may not always be aware that they are paying higher prices for the credit. Similarly, an increasing share of consumer revolving credit is obtained through pre-approved solicitations as opposed to consumer- initiated requests for credit. On the other hand, both growing consumer awareness of the importance of credit reports and easier consumer access to credit reports and credit scores serve to increase consumer vigilance. The credit reporting companies also could address some of the issues identified above. For example, developing a plaintiff code system for collection and public records would allow credit evaluators to differentiate among different types of these records in assessing credit risk. Similarly, expanding stale account rules and identifying accounts of creditors that are no longer reporting information to the credit reporting companies would assist credit evaluators in determining how much weight to give not currently reported accounts. Most of the problems cited above result from the failure of creditors, collection agencies, or public entities to report or update items—areas that are beyond the direct control of the credit reporting com- panies. Thus, fully resolving these problems requires a more comprehensive and consistent reporting sys- tem, particularly with regard to major derogatories, collection agency accounts, and public records. Some changes in this vein are happening already. For exam- ple, only about 13 percent of revolving accounts now being reported to the credit reporting company that supplied the data are missing credit limits. This reduction from the 33 percent incidence at the time the sample used for this evaluation was drawn (1999) occurred in part because of pressure on creditors by the credit reporting companies and others. In the interim, some steps might be considered to mitigate or reduce the effect of the problems noted above. Credit evaluators might develop models that identify individuals whose credit files are likely to contain data problems. Factors such as missing credit limits, not currently reported accounts, and duplica- tive collection accounts or public records may be good indicators of individuals whose credit scores are potentially less predictive. Creditors might judgmen- tally review actions on applicants estimated to have a high likelihood of significant error, particularly those whose credit scores place them in a range in which the price or availability of credit is likely to be affected. Such reviews, with the potential to gather more information from the consumer, may be able to resolve problems in the credit evaluations for identi- fied borrowers. In reflecting on these data limitations and rem- edies, several issues should be kept in mind. First, although some problems in the credit reporting data that are likely to affect the credit evaluation of individuals have been identified, it is very difficult to determine the extent to which credit availability would change if these problems were addressed. It is likely that data issues will materially affect the avail- ability and pricing of credit only for those individuals of marginal creditworthiness. Second, the costs of correcting the identified data problems have not been evaluated. Some of the problems may be very diffi- cult and expensive to overcome, and in some cases the costs may exceed the benefits. Finally, this analy- sis rests on the experiences of only one of the three national credit reporting companies and uses data that are now somewhat dated. Many changes are taking place in the credit reporting industry, and they may mitigate some or all of the highlighted limitations.