516 THE JOURNAL OF CONSUMER AFFAIRS BITS, BRIEFS AND APPLICATIONS ROBERT B. AVERY, KENNETH P. BREVOORT, AND GLENN B. CANNER Credit Scoring and Its Effects on the Availability and Affordability of Credit The Fair and Accurate Credit Transaction Act of 2003 (the FACT Act) directed several federal agencies to conduct studies related to the credit reporting industry. A primary concern was the accuracy and fairness of the credit reporting and scoring systems. In this article, Federal Reserve System Board economists report on a study in which they examined various issues related to credit scoring, including how credit scoring has affected the availability and affordability of credit. In a responding commentary, Calvin Bradford notes flaws and deficiencies in the Federal Reserve System study. In recent decades, consumer credit markets in the United States have become increasingly national in scope and credit has been extended to a broader spectrum of consumers. The development and use of credit scores has greatly facilitated these trends. Credit scoring is a statistical technology that quantifies the credit risk posed by a prospective or current borrower. Credit scores seek to rank order individuals by their credit risk so that those with poorer scores are expected to perform worse on their credit obligations than those with better scores. Credit scoring is widely used to evaluate applications for credit, identify prospective borrowers and manage existing credit accounts. It is also used to facilitate decision making in other areas, including insurance, housing, and employment. The large savings in cost and time that have Robert B. Avery, Kenneth P. Brevoort and Glenn B. Canner are all Economists, Division of Research and Statistics of the Board of Governors of the Federal Reserve System Board. The views expressed are those of the authors and do not necessarily represent those of the Board of Governors of the Federal Reserve System or members of the staff. The authors wish to thank Sean Wallace and Rebecca Tsang for research assistance and Dan Sokolov, Carol Evans, Leonard Chanin, Frederic Huynh, Gregg Forte, Brian Bucks, Karen Pence, Myron Kwast, Chet Wiermanski, Jesse Leary and Matias Barenstein for helpful comments and suggestions. The study is available at www.federalreserve.gov/boarddocs/rptcongress/creditscore/default.htm The Journal of Consumer Affairs, Vol. 43, No. 3, 2009 ISSN 0022-0078 Copyright 2009 by The American Council on Consumer Interests