Credit Bureau

Credit Bureau

A credit bureau is an agency that collects borrower’s credit information and reports it to lenders and creditors so they know how trustworthy you are when taking out a loan or line of credit. The three main credit bureaus are Experian, Equifax, and TransUnion. 


 

What Is A Credit Bureau?

Credit bureaus, also known as credit reporting agencies (CRAs), are institutions that gather, organize, and report credit information about consumers in a given country. 

These reports provide financial institutions with a credit score that reflects a potential borrower’s performance on their past credit experiences, which helps to measure the potential risk involved in extending them a loan or line of credit.

The History of Credit Bureaus 

The history of credit bureaus can be traced back to British merchants during the 17th century. These merchants began sharing information about the credit situation of their clients to prevent others from extending credit lines to individuals who have failed to fulfill their financial obligations in the past.

In the United States, specifically, credit bureaus started to emerge as organizations formed across the nation to help merchants choose who they extended credit lines to. Back then, these institutions did not communicate with each other, and they were mostly formed by local businesses that shared information about their customers to form a rudimentary database with client’s information, including their names, addresses, and a brief record of their payment history. 

During the 1970s, the introduction of the Fair Credit Reporting Act (FCRA) helped the industry organize these credit reporting agencies, and today’s largest credit bureaus started to form their structures by using technology to improve the efficiency of their processes.

Today’s largest credit reporting agencies in the United States have helped to shape the industry and its practices.

What Kind of Information Is Collected by Credit Bureaus?

A credit bureau collects detailed information about credit accounts held by consumers, including:

  • Payment history: Credit reporting agencies collect information about each payment made by the borrower.
  • Outstanding balance: Credit bureaus constantly update their reports to reflect the outstanding balance of each credit account held by the borrower.
  • Credit limit: Credit reports commonly disclose the credit limit of each credit account.
  • Lender: Each credit account is associated with the lender who issued the credit.
  • Status of the account: Depending on whether the borrower has made payments on time—and the account’s overall situation—an account status could be “current,” “delinquent,” or “closed,” among others.
  • Important dates: Credit bureaus often report the date the account was opened, the date its status was last modified, or the date the account was closed.

This is just part of the information reported by a credit bureau. Many other data points are also included and used for the assessment of an individual’s credit situation and for the calculation of their credit score.

Consumer Rights Under the Fair Credit Reporting Act (FCRA)

Considering the impact that credit bureau’s activity has on consumers and their capacity to borrow funds, the Fair Credit Reporting Act (FCRA) introduced regulations to protect consumers against practices that may harm them, including:

  • A consumer must be informed if the information used by a credit bureau is being used against them.
  • Consumers have the right to know what information is on their files. In this sense, consumers are entitled to get an updated credit report for free at least every 12 months from the credit bureaus that are tracking their information. 
  • A consumer has the right to ask for the calculation of their credit score.
  • Credit information can be disputed by consumers if it is considered to be incomplete or inaccurate.
  • A credit bureau is obligated to delete or modify information that is inaccurate, incomplete, or that cannot be verified.
  • Access to a consumer’s file must be limited to institutions and users with a valid need.
  • A consumer must provide consent before their credit file can be shown to a prospective or current employer.

These and other rights not specified in the list were established by the FCRA to protect consumers, and credit reporting agencies must establish procedures that will enforce these rights.

What Type of Business is a Credit Bureau?

Credit bureaus are not government-backed institutions, even though their activities are heavily regulated due to the access that they have to sensitive information about consumers within the country. Instead, credit bureaus are private, for-profit corporations that generate revenue by providing services such as:

  • Credit monitoring
  • Unlimited access to updated credit reports
  • Specific reporting needs

Additionally, credit bureaus offer an ample portfolio of business services, including banking solutions, account verification, consumer reports, and risk assessments, among many others.

What Are the Largest Credit Bureaus in the U.S.?

Three nationwide credit reporting agencies gather, organize, and report credit information for millions of consumers in the United States: Equifax, TransUnion, and Experian. This is a brief summary of their history and how they became the largest credit bureaus in the country.

Equifax

Equifax’s history can be traced back to the 1900s when Cator and Guy Woolford founded the Retail Credit Company in Atlanta. By the 1960s, the business had grown to become one of the largest credit reporting agencies in the country, with offices in the nation’s largest states and millions of consumers in their database.

In the 1970s, as a result of the introduction of the FCRA, the company was renamed as Equifax, and ever since then, it has become a household name in the credit reporting industry around the world. Today, the company has subsidiaries in more than 24 countries and a presence in Europe, Asia, the Americas, and Australia. 

Additionally, the company reports that it has information on more than 800 million consumers and 88 million businesses across the world.

TransUnion

In TransUnion’s early beginnings, the company was not associated with credit reporting at all. In fact, it was initially founded as the Union Tank Car Company and was primarily a railroad leasing business. 

In 1969, the business acquired the Credit Bureau of Cook County and entered the industry for the first time. Since then, the company has grown to become one of the largest credit reporting agencies in the world, processing information for more than one billion consumers throughout the globe with operations in more than 30 countries.

Experian

Experian’s history started back in 1968 when TRW Inc. acquired a company called Credit Data that was later on renamed as TRW Information Systems and Services Inc. Since then, this organization has become one of the largest credit bureaus in the U.S., holding information on more than 235 million U.S. residents and 25 million U.S. businesses.

Additionally, Experian has a presence in more than 37 countries throughout the world, including Brazil, Mexico, and Argentina, and the company is based in Dublin, Ireland.

Other Credit Reporting Agencies

Other institutions also provide third parties with information about consumers’ credit situations, including:

  • Employment screening agencies
  • Tenant screening agencies
  • Check and bank screening agencies
  • Agencies that provide reports for personal property insurance companies
  • Agencies that report utilities, retail, and gaming consumer information

How Do Credit Bureaus Calculate Credit Scores?

While each credit bureau has its own credit scoring model, most of them rely on the FICO credit scoring model. FICO credit scores are calculated by analyzing five different variables regarding an individual’s credit situation:

  • Payment history: A borrower’s payment history is a list of all the payments that have been made on each credit account held, with an emphasis on the punctuality of such payments. This item affects 35% of the credit score calculation.
  • Amounts owed: The amount owed by a borrower also affects their credit score to a large extent (30%), and one of the most important metrics of this variable is the credit utilization rate, which is the percentage of a borrower’s credit limit that is currently being used.
  • Length of credit history: The age of a borrower’s credit accounts is another important aspect of calculating a credit score. It impacts 15% of the calculation, and it is the average number of years the borrower has had open accounts.
  • Credit mix: This variable tracks the different types of credit accounts held by a borrower, including revolving credit accounts, mortgages, and other types. This item affects 10% of the credit score calculation.
  • New credit: Borrowers are also evaluated based on the number of new credit accounts they have opened. A large number of new credit accounts in a short period of time tends to negatively impact this variable, and its impact on the overall calculation of the score is limited to 10%.

When these variables are weighed together, the scoring model generates a credit score that typically ranges from 580 to 800. 

These results provide an assessment of a borrower’s creditworthiness that can be understood as follows:

  • Less than 580: This score is classified as “poor,” and it indicates that a borrower is a risky candidate for a loan. 
  • 580 – 669: These scores are rated as “fair,” which means that the borrower has had issues fulfilling certain payment obligations on time but might be a suitable candidate for certain types of loans.
  • 670 – 739: This score is considered “good,” and most lenders will be inclined to approve a loan for a candidate with such scores.
  • 740 – 799: This range is rated as “very good,” and it shows that the borrower is a suitable candidate for most types of loans.
  • 800 or more: Also known as an “exceptional” score, this range is well above the average for most U.S. consumers, and it indicates that the borrower is a low-risk candidate.

Can a Consumer Dispute a Credit Report?

The Fair Credit Reporting Act (FCRA) gives borrowers the right to dispute items on their credit reports that are believed to be inaccurate, incomplete, or that cannot be backed by sufficient evidence.

Credit bureaus must provide adequate channels for borrowers to file disputes based on the FCRA stipulations, and these disputes must be handled adequately to ensure that any mistakes made on the report are corrected promptly.

Consumers should review their reports periodically to make sure they accurately reflect their credit situation, and if consumers ever find wrong or incomplete information, they can follow these steps to file a dispute with the credit bureaus:

  • Step 1: Inform the credit reporting agency that made the alleged mistake about its existence through a formal letter that includes evidence (copies, not originals) that back the claim. Credit bureaus will typically process this information and provide an answer within 30 days as long as the claim is valid and sufficiently supported by evidence.
  • Step 2: The consumer must also inform the provider (the financial institution or business that has issued the credit account) about the claim through a formal letter, notifying them that they have disputed a credit item from their organization.

Both credit reporting agencies and providers will typically act promptly on any valid claims to delete or modify the credit information to make sure new reports accurately reflect the consumer’s credit situation.

Commercial Credit Reporting Agencies

Most of the activity of credit bureaus is focused on consumer credit, but some institutions also track commercial credit. The most common scores produced for commercial credit assessment include:

  • The Paydex Score from Dun & Bradstreet
  • The Risk Rating from Creditsafe
  • The Experian Intelliscore
  • Cortera’s CPR Score
  • Global Credit Services’ GCS Score

All nationwide credit bureaus produce a version of commercial credit scores, and lenders and businesses employ these scores to decide whether a company should be approved for a line of credit based on its past payment history and other variables.

Bottom Line

Credit bureaus are institutions that gather, organize, and report information about the credit situation of consumers and businesses in the United States and around the world. The largest credit bureaus in the U.S. are Experian, Equifax, and TransUnion, and they process information for millions of Americans. 

The activity of credit bureaus is regulated by the Fair Credit Reporting Act (FCRA) along with other laws enacted to give consumers certain rights on the information reported by these institutions.

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References
  1. https://www.consumer.ftc.gov/articles/0151-disputing-errors-credit-reports
  2. https://www.myfico.com/credit-education/what-is-a-fico-score
  3. https://files.consumerfinance.gov/f/documents/cfpb_consumer-reporting-companies-list.pdf
  4. https://www.consumer.ftc.gov/articles/pdf-0096-fair-credit-reporting-act.pdf
  5. https://www.philadelphiafed.org/-/media/consumer-finance-institute/payment-cards-center/publications/discussion-papers/2002/CreditReportingHistory_062002.pdf