Also known as credit reporting agencies, credit bureaus are companies that collect and maintain available credit records for individuals and businesses. Credit bureaus typically generate their revenues by marketing their collected data to eligible lenders, creditors, employers, property managers, government agencies, businesses and other institutions. Most individuals rarely interact directly with credit bureaus. However, credit bureaus have a direct effect on people’s financial lives through their credit reports and ratings.
One way to view these credit agencies is as a clearinghouse for information on individual’s and business’ credit histories, with data such as previous debt obligations, current debts and payment history details.
In many ways, credit bureaus have facilitated the growth of the consumer loan industry and the expanded access to credit enjoyed by many people.
Although some countries maintained credit information on consumers as far back as the 1860s, these credit reporting entities grew rapidly following World War I. Prior to that time, most consumers had limited and specific access to credit: merchants would extend credit, but only to local individuals they knew. Although not perfect, this was an effective way for creditors to control their risk exposure.
Unfortunately, it meant that consumers usually had a limited circle of merchants or people that they could tap for credit.
As merchant businesses grew, particularly with the growth of larger department stores and retail shops, the need for credit (to drive more purchases and sales) also grew. Credit reports gave merchants, lenders and creditors a way to offer loans and credit to more people, while still controlling their risk exposure.
As credit bureaus grew, they began collecting and maintaining an array of personal information about individuals and businesses. This included employment records, information obtained from a person’s mortgage holder or landlord, data that was available through public records, and direct investigations of the person.
The digital revolution, especially the Internet, has also driven the evolution of the credit reporting agencies. Just two decades ago, it was not unusual for banks and lenders to wait several days before they received credit reports on their mortgage, automobile or personal loan applicants. Today, credit bureaus use the Internet to deliver credit reports in real time.
Another development has been the increased use of credit scoring systems, such as FICO and Vantage Scores. These credit scoring programs are algorithms that analyze an individual’s available credit data and provides a credit score based on that data. Note: because different credit bureaus may have different sets of data available on the same person, their credit scores may also vary.
Credit bureaus are often classified as either business or consumer, though many collect, maintain and distribute both business and consumer credit history. While many credit bureaus follow the credit information of individuals, the need for commercial credit checks on small businesses to large international companies has grown.
But credit bureaus, regardless of whether they focus on business or consumer credit, work primarily with businesses and institutions. In addition to providing credit reports and credit scores, the data gathered by these bureaus actually allow them to provide even more marketing and analytical services to their clients.
Today, there are three major consumer credit reporting bureaus in the United States:
For many years, an individual’s credit information was often hidden from them. The result was that consumers were often not able to understand why they were denied for credit. Even worse, consumers were sometimes denied credit because of inaccurate or incomplete data.
However, due in part to the Fair Credit Reporting Act (FCRA) passed by the U.S. Congress in 1971 and other similar legislation, U.S. consumers now have access to their credit files from the major credit bureaus. The law now entitles consumers to the following:
These legal developments have also forced credit bureaus to do a better job correcting erroneous data on credit records, as well as maintaining accurate credit records. They have also given consumers more access to their credit records and the tools to control their credit and finances.
Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.