A credit bureau is an agency that collects and sells information about the credit-worthiness, or the ability to meet debt obligations, of individuals and companies. Consumer credit bureaus maintain and report on this information for individuals, while commercial credit bureaus collect and distribute this information for businesses. A synonym for a credit bureau is a credit reporting agency. Credit bureaus provide information to a number of clients, including merchants that extend credit to consumers and businesses that extend credit to other businesses. Credit bureaus may be private enterprises or may be operated as cooperatives by merchants in a particular geographic area. Users of the services typically pay either a fee based on their amount of usage or a flat membership charge.
Credit bureaus serve as a clearinghouse for credit history information. Credit grantors provide the bureaus with information about how credit customers pay their bills, and the bureaus assemble this information into a file on every consumer or business. Credit grantors can obtain credit reports about potential customers who wish to open accounts. There are over 1,000 local and regional consumer credit bureaus throughout the United States, and most are either owned or under contract with one of the nation's three major consumer credit reporting agencies: Trans Union, Equifax, and Experian.
The largest player in the commercial credit reporting business is Dun and Bradstreet Corporation. According to Elayne Robertson Demby in Collections and Credit Risk, Dun and Bradstreet maintains a database on nearly 60 million public and private businesses worldwide, including 12 million American firms. But the rapid increase in e-commerce has changed the commercial credit reporting business in a number of ways. Customers have begun to demand information more quickly and in condensed, ready-to-use form, and a number of Internet-based credit bureaus have developed to meet these needs.
THE HISTORY OF CREDIT BUREAUS
Cooperative credit bureaus were known in some countries from the early 1860s, but the industry experienced rapid growth only after World War I. They were originally organized to facilitate the exchange of credit information among merchants. Until the arrival of credit bureaus, the very small amount of credit granted was based on the merchant's own knowledge of the customer.
The earliest credit bureaus just maintained lists of customers who were considered by the merchants to be poor risks. After World War I, however, the U.S. population became more mobile and credit bureaus expanded to serve a wider audience of dispersed merchants. The bureaus filled a void by providing these merchants with information that could be used to make decisions on whether to grant credit. The development of high speed computing capacity has increased the data processing power of credit bureaus and made it possible to keep more updated information on individuals and businesses alike.
CONSUMER CREDIT BUREAUS TODAY
The three major consumer credit bureaus in the U.S. are affiliated with the Associated Credit Bureaus, Inc. This international trade association, founded in 1906, provides its members with fraud prevention and risk management products, credit and mortgage reports, tenant and employment screening services, check fraud and verification services, and collection services. The Associated Credit Bureaus, Inc. represents the consumer credit reporting information industry before state and federal legislators. It also represents the industry before the media in consumer credit reporting matters. Over 500 American credit reporting agencies, mortgage reporting companies, collection services, and tenant screening and employment reporting companies are members.
Consumer credit bureaus are important and growing because some one billion credit cards are in use in the United States today. A similar number of consumer credit reports are issued annually in the United States. Two billion pieces of data are entered monthly into credit records. Each of the three major consumer credit reporting systems—Equifax, Experian, and Trans Union—maintains 190 million credit files, which are used by independent credit reporting agencies across the United States.
The power of credit bureaus grew as they became the primary source through which a consumer's creditworthiness was judged. If an individual's credit information with a bureau was incorrect, she was at risk of being denied credit, insurance, or even employment based on the erroneous information. Worse yet, the individual may not have known why she was denied. The credit scoring systems used by credit bureaus was a closely held secret.
In the 1990s and early 2000s the country saw a rise in consumer fraud and in particular, identity theft. The victims of identity theft often find themselves struggling with credit bureaus to repair their credit scores in the wake of the crime. This effort is made more difficult by the secrecy of the credit scoring process. A flurry of state and federal legislation has been passed, aimed at protecting the privacy of personal data while also granting consumers access to their own credit information. In late 2003 the Fair and Accurate Credit Transactions Act was passed. This law is designed to improve the quality of credit information and protect consumers from identity theft schemes. Some of the provisions of the law include:
- Giving Americans the right to their credit report free of charge every year. Consumers will be able to review a free report every year for unauthorized activity, including activity that might be the result of identity theft.
- Helping prevent identity theft by requiring merchants to leave all but the last five digits of a credit card number off store receipts.
- Creating a national system of fraud detection to make identity thieves more likely to be caught. Previously, victims would have to make phone calls to all of their credit card companies and three major credit rating agencies to alert them to the crime. Now consumers will only need to make one call to receive advice, set off a nationwide fraud alert, and protect their credit standing.
- Establishing a nationwide system of fraud alerts for consumers to place on their credit files. Credit reporting agencies that receive such alerts from customers will now be obliged to follow procedures to ensure that any future requests are by the true consumer, not an identity thief posing as the consumer.
- Requiring regulators to devise a list of red flag indicators of identity theft, drawn from the patterns and practices of identity thieves.
- Requiring lenders and credit agencies to take action before a victim even knows a crime has occurred. With oversight by bank regulators, the credit agencies will draw up a set of guidelines to identify patterns common to identity theft, and develop methods to stop it.
THE THREE MAJOR CONSUMER CREDIT BUREAUS
Equifax serves the financial services, retail, credit card, telecommunications/utilities, transportation, information technology, and health care industries, as well as government. Global operations include consumer and commercial credit information services, payment services, software, modeling, analytics, consulting and direct-to-consumer services. Equifax provides services and systems that help grant credit, authorize and process credit card and check transactions, manage receivables, authenticate, identify and manage digital certificates, predict consumer behavior, market products, and manage risk. Equifax serves the U.S., Chile, Argentina, U.K., Spain, Portugal, Canada, Peru, El Salvador, and Brazil.
According to its mission statement, Experian uses the power of information to help its clients target prospective customers, manage existing customer relationships, and identify opportunities for profitable growth. Through its Web-based products and services, Experian enables clients to conduct secure and profitable e-commerce. Experian is a subsidiary of The Great Universal Stores PLC and has headquarters in Nottingham, U.K., and Orange, California. Its 12,000 employees support clients in over 50 countries and annual company sales are $1.5 billion.
Trans Union is the third primary source of consumer credit information and also offers risk and portfolio management services. They serve a broad range of industries that routinely evaluate credit risk or verify information about their customers, which includes financial and banking services, insurance agencies, retailers, collection agencies, communication and energy companies, and hospitals. Trans Union operates nationwide through a network of offices and independent credit bureaus. They have many subsidiaries and divisions in the U.S. and abroad.
COMMERCIAL CREDIT BUREAUS
The Internet has created a number of changes in the commercial credit reporting business. Electronic commerce and online business-to-business (B2B) transactions have expanded the need for commercial credit checks to include small businesses and foreign firms. In the meantime, the instantaneous transfer of information over the Internet has caused client companies to expand their expectations about the manner in which they receive credit reports. "With more companies doing business with smaller firms and companies overseas, obtaining credit information on those businesses is more important today than ever," Demby noted. "Customers are demanding more information faster, and in a format that allows them to make rapid-fire decisions about whether or not to grant credit."
The changing demands of client companies has increased competition among commercial credit bureaus. Many new players have sprung up online, where they are collecting newly available data and distributing it at a lower cost than traditional reporting firms. For example, CreditRiskMonitor.com, established in 1997, is an Internet-based credit reporting agency that provides up-to-the-minute data and credit analysis on 35,000 public U.S. companies worldwide.
In addition to increased competition from Internet-based reporting agencies, commercial credit bureaus face several new business trends in the twenty-first century. For example, more commercial credit reporting agencies are beginning to offer information on small businesses, which represent an increasing share of the overall market. Consumer credit expert Experian has begun offering a commercial credit service that combines a small business's financial information with personal information about the small business owner to create a risk score. Another emerging trend involves providing credit information in real time in order to assist clients in making quick decisions about whether or not to extend credit. Instead of providing a mass of financial information, many commercial credit bureaus are moving toward evaluating the information in advance and providing clients with credit scores.
Bennett, Andrea. "Credit Scores Are Due to Go Public." Money. 1 August 2000.
"Check Your Credit." Phoenix Business Journal. 22 September 2000.
Demby, Elayne Robertson. "Getting a Line on Lending." Collections and Credit Risk. January 2001.
Goodman, Jordan Elliot. Everyone's Money Book on Credit. Dearborn Trade Publishing, 2002.
Hill, Sidney, Jr. "Hungry for Credit Data?" Collections and Credit Risk. 31 August 2000.
Mitchel, Leslie. "Credit Bureaus Big on Errors, Small on Fixes." The Salt Lake Tribune. 3 November 2005.
The White House Fact Sheet: President Bush Signs the Fair and Accurate Credit Transactions Act of 2003. Available from http://www.whitehouse.gov/news/releases/2003/12/20031204-3.html. Retrieved on 4 January 2006.
Hillstrom, Northern Lights
updated by Magee, ECDI
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.
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.
A privately owned, profit-making establishment that—as a regular business—collects and compiles data regarding the solvency, character, responsibility, and reputation of a particular individual or business in order to furnish such information to subscribers, in the form of a report allowing them to evaluate the financial stability of the subject of the report.
Credit bureaus ordinarily prepare and issue reports for lending institutions and stores that investigate the financial reliability of an applicant for credit prior to the execution of the credit agreement.
Credit bureaus are regulated by the federal fair credit reporting act (15 U.S.C.A. § 1681 et seq. ) and by state statute to safeguard against abusive and damaging practices.