It’s a bedrock fact of credit: Unpaid loans take seven years to expire from your credit report.
But why is seven the magic number?
“We don’t actually know,” said Stuart Pratt, president of the Consumer Data Industry Association, the trade group for U.S. credit bureaus.
In 1970 the Fair Credit Reporting Act enshrined seven years as the lifespan for most types of negative information to remain on your credit report. You can expunge errors at any time, but accurate negative information, with a few exceptions, sticks around for seven years.
Now, 44 years later, consumer advocates are attacking the period as being unfairly long. On the other hand, credit bureaus are defending it as a proven way for lenders to measure a borrower’s risk. But even experts in the field are hard pressed to point to the basis for the timespan.
“I have no idea where the seven years originally came from,” said Barrett Burns, president and CEO of VantageScore, the No. 2 credit score company after industry leader FICO.
Kenneth McLean was present at the creation of the FCRA. As a staff member of the Senate Banking Committee in 1969, he worked closely with Sen. William Proxmire, the Wisconsin Democrat who proposed the bill and pushed it through Congress. McLean, now retired and living in northern Virginia, can’t recall why seven years was chosen as the expiration period.
“My guess is, it was already part of the practices of the credit bureaus,” he said.
Back then, many industry practices had little evidence showing they actually worked, McLean recalled. Items on a credit report are supposed to indicate how risky you are as a borrower. But when the FCRA was written, many credit reports contained sections on your character, habits and morals — however difficult it might be to measure those traits objectively.
“They thought someone who lives the straight and narrow path will be a better risk,” he said. “I think they gradually realized that most of this information wasn’t useful.” The largest bureau, Equifax forerunner Retail Credit Co., was founded back in 1899 and focused on providing information to insurers.
Even accuracy was not always a priority. At one congressional hearing, Michael E. Tanner, an ex- Retail Credit Co. worker, testified that the company imposed a monthly quota for negative items on individuals’ credit reports. Inspectors, faced with their own quotas, rarely checked the information, he added.
“I remember that witness,” McLean said. “We made a lot of hay with him.”
Credit bureaus fought the FCRA. John Spafford, head of the then-industry group Associated Credit Bureaus Inc., told Congress the rules would squeeze the flow of information that businesses needed to make decisions, according to the Congressional Record.
Today, researchers aren’t surprised that cutoff points in the fair credit law are less than scientific. Jim Harper, a senior fellow at the free-market oriented Cato Institute, has written studies on the FCRA. Asked about the expiration period for debts he said, “If I were to guess, based on my experience as an aide on Capitol Hill, someone very likely said, ‘Hmm, how about seven?’ ”
The measure that Proxmire pushed through the Senate originally contained a 14-year period for bankruptcies to remain on credit reports. That was shortened to 10 years by the time the bill made it through conference with the House and was signed by then-President Nixon in 1970. The change smacks more of politics than rigorous scientific analysis.
“Ultimately I’m sure there was a compromise worked out,” said Pratt, head of the credit bureau trade group.
Now some politicians are demanding justification for the cutoff points that were locked in 44 years ago. The predictive value of negative data starts to decline sharply after just two years, Rep. Maxine Waters said in a summary of her draft proposal to overhaul the FCRA. Other nations do fine with shorter expiration periods, such as Sweden, with three years, and Germany, with four, she said.
Pratt, who serves on an international credit reporting committee sponsored by the World Bank, responded that 82 percent of developed nations keep negatives on credit reports longer than four years. “Anybody can cherry-pick some country and use that as a basis for comparison,” he said, “but that’s not good science.”
What about the science behind seven years? While its analytical foundation may be lacking, he said, the long tenure of the seven-year period means that it is baked into credit models used to deny loans — or approve them.
“Since  we’ve had a lot of science,” he said. A shorter expiration period for unpaid debts will force lenders to make less refined distinctions between borrowers. So instead of opening more doors for credit, a shorter expiration period might close them. “When people look more alike, you have to manage risk at a higher threshold,” he said.
The credit bureau industry made basically the same argument before Congress in 1969. But it was up to legislation to limit what lenders and other businesses know about us, and how they use it. One idea now is to keep the seven-year period for lenders, but limit it for employers who use credit reports to screen job applicants. Denying someone a job because they are having trouble paying their bills creates a bitter trap for those struggling with unemployment, consumer advocates say.
McLean figures the law he helped write is due for a fresh look. “It certainly wasn’t a perfect statute to begin with,” he said. “There was a lot about the industry and its practices that we didn’t know.”