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Living with credit

Are credit reports being overused?

Kelly Dilworth

Lenders, potential employers or landlords aren’t the only ones clamoring for access to your personal credit history.

Some health care providers use it to decide whether or not patients can afford costly medical treatment. And even the federal health insurance marketplace, HealthCare.gov, uses it to verify applicants’ identities.

Are credit reports being overused?

“While it was originally intended to be used by lenders to assess whether or not to approve a consumer for new credit, credit history is now being used for many non-lending purposes,” write the Corporation for Enterprise Development’s Alicia Atkinson and the National Immigration Law Center’s Angel Padilla in a joint report.

That’s led some consumer advocates, such as Atkinson and Padilla, to complain that blemished credit histories are unfairly holding people back. “Credit history is a key determinant of who can get ahead financially and who cannot,” write Atkinson and Padilla. “Although credit reports can be a good source of information regarding loan repayment and borrowing history, there are few links between credit history and some of its more recent applications, such as getting a job, renting a home or obtaining medical insurance.”

A tough break can cost you more than just your credit score
The problem, say consumer advocates, is that a bad credit history not only makes it next to impossible to get an affordable loan; it also makes it harder to do the things you need to do to dig your way out of a financial catastrophe, like get a good job or an apartment in a safe area. “Nearly half (44 percent) of households in the United States are ‘liquid asset poor,’ meaning they have less than three months worth of savings,” write Atkinson and Padilla. “Barriers to employment and housing, such as credit checks, perpetuate this vulnerability.” They also make it more likely you’ll have to rely on expensive forms of credit, such as payday loans, to make up for the lost income.

In addition, you may have a harder time getting ahead if you don’t have a credit history at all, say Atkinson and Padilla. For example, if you’re trying to apply for health insurance through the Affordable Care Act’s online marketplace, you may be temporarily thwarted if your lack of credit history prevents the federal marketplace from verifying your identity. (You can get around this credit history barrier by calling a marketplace representative at 800-318-2596 and supplying extra verification, such as your driver’s license. But it could take you awhile to get it sorted out.)

Some consumer advocates also cite privacy concerns when nontraditional users such as hospitals try to access people’s credit histories. Others worry about what happens when people find mistakes on their credit reports and can’t get them immediately fixed.

But is there a better alternative?
A number of lawmakers have introduced legislation that would limit non-lenders’ use of credit reports. For example, in December, a group of Democratic Senators, including Massachusetts Sen. Elizabeth Warren, introduced a bill barring employers from using a person’s credit history to deny them a job.

In addition, some consumer advocates, such as Atkinson and Padilla, argue that nontraditional information, such as rent or utility payments, should also be taken into account by lenders and non-lenders alike since this could help showcase on-time payments by people that have never had a loan. However, others, such as the National Consumer Law Center’s Chi Chi Wu, argue that doing so could unintentionally harm low-income consumers who may struggle with complicated circumstances, such as unexpectedly high utility bills.

Turning to additional, non-credit-related sources of information could also have another unintended side effect: consumers could be judged by information they have limited control over — and might not even know exists.

For example, if a car insurance company or an employer uses an alternative consumer reporting company, such as CoreLogic or LexisNexis, to screen you for eligibility purposes, you’re technically still protected by the Fair Credit Reporting Act. So you have a right to see what’s in your file and dispute any inaccuracies.

But unlike the big three credit reporting agencies (Equifax, Experian and TransUnion) who provide free annual reports through AnnualCreditReport.com, smaller consumer reporting agencies are notorious for making it difficult to get a hold of your report.

There are also so many of them that it’s next to impossible to screen all of them and make sure that what they’re reporting is correct. At least with a traditional credit report, which is more strictly regulated, it’s relatively easy to find out what’s being said about you and to challenge it if you find a mistake.

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