All About Credit Bureaus
Updated: Aug 4, 2020
Credit bureaus have gotten a lot of publicity lately, and rightfully so. Even with the publicity, there is a certain type of unknown mystique surrounding credit bureaus, their objectives, and their services. This article will provide background information on what a credit bureau is and what services they provide (including credit reports).
Credit bureaus, sometimes called credit reporting agencies, are companies that collect and maintain individual’s credit information and history. Their purpose is to provide creditors and lenders accurate information regarding an individual’s credit background. Creditors can be anyone from credit card companies, banks, mortgage lenders, landlords, employers, etc. Information collected by the bureaus can include: past bankruptcies, tax liens, repayment history, amount of credit available, current open lines of credit, and sensitive personal information. This information then assists lenders in making educated decisions on who can borrow money and what the default risk is of each borrower.
When lenders wish to obtain information from a bureau, they do so in the form of credit checks. A lender will pay a bureau, or all three, for either a hard or soft credit check to determine a consumer’s credit worthiness.
Hard credit checks are initiated with the consumer’s knowledge and approval, usually taking place during an application for: a mortgage, credit card, business or personal loan, student loan, opening a bank account, etc. Soft inquiries are initiated either with or without the consumer’s permission (such as being pre-approved for credit cards) and do not affect the consumer’s credit score. These can include: checking your own credit score, pre-approval for credit cards, background checks, applying to rent an apartment, renting a car, establishing new utilities or cell phone contracts, etc.
Along with selling credit reports, bureaus generate income from other services:
– Decision analysis: a detailed report of an individual’s transaction history and the analytics of how that individual interacts with different types of debt. Similar to a credit report but much more in depth. One website states that their decision analysis software will help creditors gain more share of consumers’ wallets.
– Marketing bureaus: the selling of lists of credit-worthy individuals to credit card companies, this is the “pre-approval” process. Therefore, you receive many pre-approved credit card solicitations in the mail.
– Consumer services such as credit monitoring, fraud, and identity theft protection for businesses and individuals.
There is a misconception that these bureaus are looking out for the best interest of individuals, but really their primary clients are creditors and lenders. Of the above services, only one is geared towards individuals’ protection, and you have to pay for the service. The other services are intended to entice you use more credit. I believe a lot of the confusion comes from the word bureau itself. Many people assume the word bureau means it is a government entity that is in turn looking out for the public’s best interests. In actuality Equifax, Experian, and TransUnion, three of the largest credit bureaus, are publicly listed companies.
The main objective of these companies is to assist their clients (businesses) in obtaining credit information of potential borrowers. The more sales they have, the greater the income and the higher the stock price. In case you want more proof, just look up their mission statements, values, and how they define their customers online.
Before we all go grabbing for our pitchforks, credit bureaus are still very necessary. They ensure lenders have the needed information to make decisions and issue loans. Credit reports help to determine who is eligible for loans and corresponding risks associated with each potential borrower. Although credit bureaus do not necessarily have our interest as their first priority, without them, the process of determining credit worthiness would be a much more difficult and expenses for both the consumer and lender.
Feel free to reach out with any questions,
Evan Werckenthien, CFP©
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Source: Experian, Federal Reserve