A data breach at credit bureau Equifax EFX, -0.36% has raised questions for consumers, who even before the incident may not have fully understood their credit report and credit score.
Many consumers were outraged and confused about how the breach could happen.
“Equifax executives cannot be allowed to wash their hands of this while millions of Americans are left to deal with the consequences,” tweeted Sherrod Brown, a Democratic senator from Ohio.
Many also had problems contacting Equifax after the breach in order to protect their data by freezing their credit reports.
After the breach and its aftermath, here are some questions you might have:
Do I have a credit report?
If you have ever applied for credit, you do have a credit report, said Nick Clements, the co-founder of personal finance company MagnifyMoney, who previously worked in the credit industry. Consumers may start their reports when they apply for their first credit card, or another form of credit such as a student loan, he said.
The report contains information including identifying information (such as name, address and Social Security number), the individual’s credit accounts (such as credit cards, auto or student loans and mortgages), the history of credit inquiries on the report (the times potential creditors have accessed the report) and public record and collections information.
Why are there three credit reporting agencies?
Each of those agencies collects data separately, said Josh Lauer, a communication professor at the University of New Hampshire, who is the author of “Creditworthy: A History of Consumer Surveillance and Financial Identity in America.”
The first credit bureaus in the U.S. started to appear in the late 1800s, Lauer said, and were informal. They originated from small stores that would extend credit to individual buyers. Eventually, those creditors teamed up to share information on those consumers to minimize the risks they were taking lending to them.
In the 1950s, there were close to 2,000 credit bureaus across the country, said Michael Staten, an associate dean at the University of Arizona who studies the history of credit in the U.S. But thanks to computerization throughout the 1960s to 1980s, data could be stored more centrally, and many bureaus started to consolidate into fewer ones.
Over time, a few bureaus became more powerful and purchased smaller bureaus, leading to the three largest agencies today. That competition is actually good for consumers, because the three bureaus market themselves to lenders as having the best and most accurate information, Staten said.
During that consolidation process, Congress debated in the 1960s whether the government, rather than the private sector, should keep a database of consumer data. But ultimately, Congress ruled it would not keep a central database, when companies were doing so already, Staten said.
The Equifax breach seems to have renewed that debate. But government data has also been breached in the past, as a 2015 breach at the Internal Revenue Service showed.
There are more companies that track consumers’ credit, but they are not as widely used by lenders, Clements said. One such company is ChexSystems, which primarily analyzes bank accounts such as checking accounts, rather than credit accounts.
Why do these credit companies have my personal information?
Credit reporting came from lenders’ need throughout history to determine how much risk they were taking on, Staten and Lauer said, which is why it was never a service the government provided. But the agencies are regulated by the government.
The Fair Credit Reporting Act, which was passed in 1970 and has since been amended twice, regulates how credit reporting agencies are allowed to use consumer data.
It guarantees certain rights for consumers, including a requirement that anyone who uses a credit report to deny an application for credit must tell the consumer why, and the right to dispute inaccurate or incomplete information.
But that doesn’t always happen. Credit scores can be damaged for unexpected reasons such as identity theft.
And consumers sometimes don’t realize taking certain actions that can hurt their score. For example, a “hard” credit inquiry, which lenders often need to make in order to access the consumer’s credit report, temporarily docks the score a few points. Some consumers don’t realize that when they apply for credit. Consumers in some cases have been successful in asking for those inquiries to be removed.
So if I apply for credit, do I have a credit score?
Although consumers have a credit report once they apply for credit, that does not mean they have a credit score yet, Clements said.
There are multiple companies that create scores for consumers to summarize the information in their credit reports into a number. One of the best known, FICO (a shortened name for — the Fair Isaac Corporation — does not create an actual credit score until a consumer has at least one credit account that has been opened for six months or more.
Consumers can also get a version of a score from many apps and websites, including Credit Karma, Clarity Money and some banks’ and credit-card issuers’ websites and apps.
But those scores are just a way credit companies are helping consumers understand what is on their report, Clements said. “It’s a useful tool to give you a general sense.”
Many lenders develop their own scoring systems that differ slightly from whatever score consumers might see when they inquire about their score, he said.
One exception to that is scoring when applying for a mortgage, Clements said: agencies Fannie Mae and Freddie Mac explicitly say which score they will use to determine creditworthiness.
How do I get credit if I don’t have a credit score?
If a consumer has a parent who uses credit cards responsibly and is willing to let him or her be an authorized user on a credit card, or even open a card in a child’s name (whether or not the child is given access to using the credit card) that helps build credit, Matt Schulz, a senior industry analyst at the credit card website CreditCards.com, previously told MarketWatch.
If that is not an option, consumers can start by applying for their own credit card, such as through a bank or a retail store, which sometimes have cards that are easy to qualify for. But consumers must pay their bills on time in order to benefit; late payments are detrimental to a score, as is using a high percentage of the total credit available. So using the card little and paying it off frequently helps.
Consumers who don’t want to use credit cards can use secured cards, which help them build credit, but require a deposit, making them function more similarly to a debit card.
There are also services consumers can use, such as RentTrack.com and RentReporters.com, that will report their on-time rent payments into their score, since most landlords don’t report rent to reporting agencies. They charge fees, but can help consumers with little credit raise their scores fairly quickly.
How do I check my credit report and score?
Consumers can get one free credit report from Equifax, Experian and TransUnion every 12 months by visiting AnnualCreditReport.com.
There are many companies that can show consumers a version of their credit score, including Credit Karma, Credit Sesame and LendingTree. Some banks and credit card companies also provide scores, such as Discover DFS, +0.19% and Citi.C, +0.12%
Why is a credit report so hard to read and understand?
Credit-reporting agencies have created what are essentially databases of consumers’ data, in the form of credit reports, Clements said. They are designed for banks and other lenders to access in order to determine how risky it is to lend to consumers.
They were not designed for consumers to read themselves, he said, which is why companies such as Credit Karma, which was founded in 2007, have become successful: That company and others similar to it simplify those reports for consumers by giving them a free version of their score and explaining what contributes to it.
What makes up my credit score?
A FICO credit score is based 35% on a consumer’s history of paying previous debts, including credit cards and installment loans. Some 30% of the score comes from the amounts a consumer owes, in all forms of debt he or she has. Credit history, the amount of time consumers have had their credit accounts open, makes up 15% of the score.
Credit mix, the combination of credit cards, installment loans, mortgage loans and other types of debt a consumer has makes up 10% of a score. Having a mix of credit cards and loans can actually help one’s score, but mix won’t be a key factor in how high or low a score is, FICO says on its website. And 10% of the score is based on how many new forms of credit a consumer has recently opened.
Other companies have created their own credit scores to compete with FICO scores, such as the VantageScore, but they are made up of similar components.
What does my credit score mean?
Companies that report credit scores to consumers use different scales. Consumers with lower scores may be rejected for credit and will often be given higher interest rates on loan products including credit cards. Having a lower score can cost consumers thousands of dollars or more in future interest payments.
Basic FICO scores range from 300 to 850. A score of 800 and above is considered “exceptional,” and lenders view consumers with scores within that range as “low risk.” A score that is 740 to 799 is “very good,” and consumers in that range are also likely to be approved for credit and offered low interest rates on loans. A score of 670 to 739 is “good,” or in the “median” range for consumers; a score between 580 and 669 is “fair” and 579 or lower is “poor.”
But as Clements said, lenders often use their own scoring systems, so any score consumers receive from agencies should merely be viewed as an indication of their overall credit health.
Is there any way to opt out of having a credit score?
Consumers who have applied for credit have given personal information to credit reporting agencies, but they can limit who sees that information once it’s there, said Jason Tompkins, an attorney at the firm Balch & Bingham in Birmingham, Ala., which specializes in consumer finance litigation.
OptOutPreScreen.com which allows consumers to opt out of receiving offers from firms, such as credit-card companies or insurers, that the consumer did not initiate contact with.
What is a credit ‘freeze,’ and is it different from a credit ‘lock?’
Credit reporting agencies are required by state laws to provide consumers with the ability to “freeze” their credit report. This typically costs a fee in many states, although in the aftermath of the Equifax breach, the agencies have begun to offer the service for free.
A credit freeze prevents lenders from accessing a consumer’s credit report; without a freeze, they are able to access them, in order to market products to consumers who qualify. But a freeze also means that a consumer cannot take out a new loan or credit card without “unfreezing” the report first.
Freezing or locking a report does not damage a consumer’s credit.
After the Equifax breach, security experts suggested consumers should freeze their reports at Equifax, Experian and TransUnion as a line of defense against fraudsters who might try to access them.
The credit agencies also offer a service called credit “locking,” which offers the same protections as a freeze, but typically cost a monthly fee. Those services sometimes come with additional perks such as fraud alerts. A main difference between the “lock” and the “freeze” is that consumers are able to lock and unlock their reports themselves quickly, whereas for a freeze, they must contact the bureau and typically wait a few days for it to unlock the report.
I’m mad about the Equifax breach. What legal action can I take?
Several consumers have already filed class-action lawsuits against Equifax, including one by plaintiffs Mary McHill and Brook Reinhard and another by plaintiffs Jamie McGonnigal and Brian Spector.
McGonnigal and Spector’s attorney John Yachunis said his clients will seek statutory damages under the Fair Credit Reporting Act, as well as reimbursement for out-of-pocket losses related to the case.
Consumers do not have to join those class-action suits, Tompkins of Balch & Bingham said. If the class-action suit is certified, meaning a court has found it meets certain requirements, consumers who are affected by the suit can wait until there is a result, such as the parties settling, or the court ruling in favor of the “class” suing the company.
At that point, every person who was affected would receive compensation allotted to them, as long as they do not opt out of the suit, he said. Individual consumers could also hire their own attorneys to sue a company, he said, and may be reimbursed for attorney fees if they are successful.
Curtis Smolar, an attorney who is the legal counsel for the law startup Legalist, said his company will pay filing fees in advance for consumers who want to sue. In return, consumers must give Legalist 30% of whatever they recover in the suit. He said these suits will help empower people “and ask these companies to be more accountable for what they do.”
How much could I receive in a class-action suit?
It’s “difficult to say” what the result of the Equifax suits will be, Tompkins said.
One of the best legal theories for the plaintiffs to recover under is the Fair Credit Reporting Act, Smolar said, as Yachunis said he planned to do.
Under the Act, consumers potentially could seek actual damages, if the breach was negligent, or statutory damages of $100 to $1,000 per violation if the breach was reckless or intentional, Smolar said. Punitive damages are also available, but they have to be proportionate to the underlying damages.
With that said, though, in a previous case, consumers only got a settlement for the money they spent on credit monitoring services, he said.
Several state attorneys general have also contacted Equifax in response to its breach.
The Massachusetts Attorney General, Maura Healey, has already said she intends to file a lawsuit against the company. The Massachusetts Consumer Protection Act provides civil penalties of up to $5,000 per violation of its data breach notification statute.