Credit Bureau

What It Means

A credit bureau is a for-profit business firm that gathers information about a person’s or a business firm’s financial stability and capacity to pay future debts. The credit bureau makes money by selling this information to interested parties. Credit bureaus that specialize in collecting and selling information about individuals are called consumer credit bureaus; commercial credit bureaus, meanwhile, handle the credit histories of business firms.

If you walk into a bank and ask for a loan, the bank will go through a process to approve you for that loan. Naturally, the bank will want to know whether you are likely to pay them back. The bank could conduct its own lengthy examination of your past behavior in relation to borrowing money and paying it back, but this would not be very efficient. Instead, the bank will pay a credit bureau to supply this information.

Credit bureaus build files on the majority of consumers and businesses in the economy. If you are an adult in the United States, your entire loan and credit-card history (as well as your banking and employment records and some personal information) is likely on file with the three main consumer credit bureaus in the country: Equifax, Experian, and TransUnion. When you apply for a loan or a credit card or try to enter into any other type of credit agreement, the prospective creditor will request a summary of your credit history from one or more credit bureaus. The summary is called a credit report, and it includes a credit score, which is a numerical figure (usually ranging from 300 to 850) that represents the likelihood that you will repay a loan.

Though credit bureaus amass and distribute credit information, they do not ultimately decide whether or not a given consumer or business gets credit or a loan. Creditors set their own standards for acceptable credit ratings and histories.

When Did It Begin

Credit bureaus are a modern phenomenon. Some organized collectors of consumer credit information existed as early as the 1860s, but the economic expansion of the twentieth century brought with it the more comprehensive credit bureaus of today. When much of the U.S. population was agrarian and geographically stable, decisions about lending money or entering into credit agreements were based largely on personal knowledge of the borrower. As the U.S. population grew and became more mobile in the years after World War I, however, businesses needed access to more objective information about people’s creditworthiness, and an interconnected network of credit bureaus grew up in response.

Changing attitudes about credit, too, gave rise to the need for more thorough information about creditworthiness. In nineteenth-century America it was very uncommon for people to buy nonessential items on credit. A farmer might borrow money to buy equipment or seed because these purchases were investments that would bring in more money at harvest time, but only the very wealthy regularly used credit to buy items not essential to their survival. Debt was considered dangerous and even immoral well into the twentieth century. As people became more comfortable with buying goods and services on credit, and as credit became easier to obtain, the need for credit bureaus grew.

More Detailed Information

In recent decades credit has become easier and easier to obtain. Credit cards, for instance, were once issued primarily to the wealthier classes in society and were used only occasionally. At the beginning of the twenty-first century, almost half of all Americans had at least one general-purpose credit card (that is, a Visa, MasterCard, American Express, or Discover card). The rise of credit as a common way to buy necessities, luxuries, and everything in between means that credit bureaus process more information and are a more vital part of the overall economy than ever before. Credit bureaus also keep track of and analyze the data derived from an ever-increasing number of loans for homes, cars, and other high-cost items.

Todayapos;s credit bureaus regularly gather information from creditors (banks; credit-card issuers; mortgage companies, which specialize in lending money to home buyers; and other businesses that extend credit to individuals and businesses) and assemble it into files on individual consumers and businesses, while updating their existing files. In addition to the data gleaned from creditors, credit files might also contain one’s employment history, previous addresses, aliases, bankruptcy filings, and evictions. Information normally stays on a credit report for seven years before being removed.

Most of the local and regional consumer credit bureaus in the Untied States are owned by or are under contract to one of the three primary consumer credit-reporting services mentioned above. Each of these three companies gathers and distributes information separately, and credit scores and reports differ slightly from bureau to bureau. Each company maintains around 200 million individual consumer credit files. Often a lender will use an average of the credit ratings provided by the three different bureaus when deciding whether or not to make a loan.

The primary commercial credit bureau in the United States is Dun and Bradstreet. D and B has credit files on more than 23 million companies in North America and on more than 100 million businesses worldwide.

In addition to providing creditors with information necessary to determine a credit applicant’s qualifications, credit bureaus make their data available for more controversial purposes. For instance, direct-mail marketers often buy information from credit bureaus in their search for potential customers. If you have ever received a letter telling you that you have been preapproved for a particular credit card at a specific annual percentage rate, it is true; the credit-card company already knows your credit rating and has indeed already approved you for the specified card. Prospective employers and landlords sometimes purchase credit histories, too.

Recent Trends

The first law establishing guidelines and consumer protections in the realm of credit reporting was the Fair Credit Reporting Act (FCRA) of 1970. The FCRA was passed by the U.S. Congress in response to growing concerns about inaccurate credit reports in the 1960s. Even after the law was passed, however, consumers typically had very little knowledge of what creditors were reporting about them, and credit bureaus kept individual credit ratings and the contents of credit reports secret.

Renewed worries about the reliability and privacy of credit reports has led to greater government regulation since the mid-1990s. Congress amended the FCRA in 1996 to deter creditors from making certain kinds of inquiries into a consumer’s credit history and to allow consumers to remove their credit reports from the lists sold to marketers. The amendment also gave consumers more power to question the accuracy of their credit reports and tightened laws punishing creditors who report inaccurate information to credit bureaus.

In 2000 the credit bureaus allowed consumers to obtain to their credit scores for the first time, and another amendment to the FCRA in 2003 further increased public access to the credit-reporting process. Since 2005, as mandated by the amendment, U.S. consumers have been entitled to one free copy of their credit report annually from each of the three national credit bureaus. Additionally, anyone who has been turned down for a loan or other transaction due to credit reporting has the right, under the amended law, to see his or her entire credit file as kept by each of the three main agencies, an almost unthinkable liberty in previous decades. The amendment also added further consumer protections to guard against identity theft, a new issue for credit bureaus in the early years of the twenty-first century.