Most of us have heard horror stories about people who have had their credit ruined because of identity theft or credit reporting errors. They save for years to make the down payment on their dream home, and show up at the bank with smiles on their faces and a bounce in their step only to be dealt the crushing blow. Even though they have been perfectly responsible with their finances, according to their credit reports, they have a poor credit rating and are not a good candidate for a loan.



It is scary how often this scenario plays out. All it takes if for a data entry worker to accidentally transpose a couple of numbers when entering a Social Security number and a bankruptcy can end up on the wrong person's credit report. When a lender sees the bankruptcy, they have little choice but to deny most loans.

For people who find themselves in this situation, there is hope. The law gives them the right to repair their credit by disputing any inaccurate listings in their credit reports, including bankruptcies. The process isn't necessarily easy and is an unfair burden placed on people whose bad credit isn't their fault, but it is possible to repair bad credit. Prior to 1970, however, this wasn't the case.

You credit rating is derived from credit reports that are created and maintained by credit bureaus. These for profit companies collect information about consumers, compile this information in the form of a credit report, and then sell this information to lenders, employers, and insurance companies who use it to make decisions about an individual's integrity and trustworthiness.

The credit bureaus used to collect all sorts of information that may or may not have been of use to the purchasers of their credit reports. Along with your financial tendencies, your credit reports could also have contained your religion, ethnicity, notes about your appearance or personal hygiene, and even opinions about you gathered from your neighbors. Just about anything the credit bureaus could learn about you was fair game.

Then, once this information made its way on to your credit reports, there was little to nothing you could do about it. Even if you were able to find out that there was incorrect information on your credit reports, which would not have been easy since they were not made available to consumers, there was no system in place for working to correct these errors. Add the fact that there were no limits on how long things could be listed on your credit reports, and you would have found yourself in a situation where an incorrectly reported bankruptcy or maybe an anti-Semitic quote was falsely attributed to you by a nefarious neighbor ended up listed on your credit reports forever. It was not beyond the realm of possibility for a listing added to your credit reports when you were 20 years old to keep you from getting a car loan after you had turned 50.

Fortunately, in these early days of credit reporting, the way people used credit reports was different. A lender would be more likely to sit down and essentially "interview" you for a loan. They would use your credit report as a reference, but you would have a chance to explain any recklessness in your past. You would be given a chance to market yourself as a responsible candidate for a loan. Even with a less then desirable credit history, you still had the opportunity to get approved for credit.

As credit became a larger and larger component of our financial system, this personalized system for approving loans became a bottleneck. It was too time consuming and inefficient to sit down with every prospective borrower. To overcome this obstacle, lenders began to place higher emphasis on the information contained in credit reports. But even then, it because burdensome to manually review each person's credit report.

To further streamline the process, statistical credit scoring was introduced in the 1950's. This involved plugging the information contained in a credit report into a credit scoring formula that would then return a credit score. No longer did lenders even have to look at credit reports. All they had to do was get a person's credit score.

Lending decisions became largely dependent on a single credit score which greatly magnified the existing problems with the credit reporting system. Now you could be denied a loan based entirely on incorrect information in your credit reports you were not aware existed and had no means to correct.

To reign in a credit system that had become a keystone in the financial industry and yet was fraught with problems, Congress passed the Fair Credit Reporting Act (FCRA) in 1970. Since then, there have been numerous amendments to the act which have worked to create the portfolio of credit rights that American's enjoy today.

It is because of the FCRA that the credit bureaus can no longer list personal information such as your race and religion on your credit reports. It is the FCRA that also imposes the 2, 7, and 10 year limits on how long certain items can remain listed on your credit reports.

Along with cleaning up what information can be added to your credit reports, the FCRA provides you with the right to order copies your credit reports and request the removal of information that should not be listed.

Today, the credit system is by no means perfect. Inaccurate information still ends up on consumer's credit reports (in alarming amounts) and credit worthy individuals still suffer from unfairly high interest rates or denial of credit. Smiles are still being turned into tears as dejected couples find out their erroneously constructed credit scores stand between themselves and their dreams.

The difference is, now people have the tools to fight back. The changes started in 1970 have been slow in coming and an uphill battle is still being fought, but as is elaborated in the book Credit Revolution: Path of the Smart Consumer, it is possible "to take advantage of credit without being taken advantage of by the credit companies".