The Truth Behind The Credit Bureaus.
A credit bureau is best explained as a clearinghouse of information on consumers. Every time you fill out a credit application, every time you make a payment, every time any new activity occurs on an account, in most cases the credit bureaus are aware of it and have been notified. The businesses that extend you credit, including credit card companies, lenders, mortgage brokers and others look to the information provided by the credit bureaus to help them make the decisions about who to give credit to, and who to avoid. In short, the information provided by the credit bureaus helps them make good business decisions and protect their assets.
The credit bureaus concept can be traced back as early as the 1860’s, and functioned primarily to provide local merchants with a way to keep tabs on the people who traded and did business in their immediate area. The ‘Credit Bureau’ essentially consisted of a list of individuals who were poor credit risks. Prior to the use of a list, merchants extended only a very small amount of credit, and that was based only on the merchant’s personal knowledge. The big three credit bureaus, Equifax, Experian, and TransUnion, all trace their ancestry to small, local investigative companies. These early credit bureaus would collect every bit of seemingly relevant information they could about a person including employment history, marital status, age, race, religion, testimonials, and any other information they could get their hands on. They would then provide this information to creditors who used it to determine whether or not a person was worthy of a loan and how much interest they would be required to pay.
In 1906, many of the bureaus are that time formed the Associated Credit Bureaus, Inc. This organization provides services like fraud prevention, risk management, check verification and collections to the credit bureaus. At that time, The Associated Credit Bureaus, Inc. represents the credit bureaus before the Federal Trade Commission (FTC) and state and federal legislators, protecting their interests.
Around 1920, the entire financial and reporting industry really began to take shape. The American population became much more mobile, and several advances in technology and electronic data helped the progress on a national scale. With a larger, more adapted American population, the base of merchants became larger and expanded. The credit industry provide information on consumers that could be used to determine whether or not to grant credit at that time, the information came from other lenders or banks which already contracted with the credit bureaus and now have relevant data and financial history. Information provided in the beginning was for the most part employment records, landlord reporting and court house records. The “Big Three” Credit bureaus, Equifax, Experian and TransUnion, are not government agencies nor are they connected in any legal manner. The bureaus do not create credit reports for consumer protection or benefit. The reason consumers have rights is due to the bureaus not verifying consumer reporting information. They are not in the business of making sure your credit reports are accurate and they do not proactively offer or provide yearly consumer copies of credit reports. Consumers have this right due to laws being passed and the government stepping in to force this right upon them.
The credit bureaus are multi million dollar corporations making money by selling consumer information to whomever is willing to purchase it. The Big Three along with the countless dozens of other information bureaus sell consumer information and data to creditors, employers, insurance companies, marketers…etc. Over time, the credit bureaus grew to the current system options of the three major nationwide credit bureaus. With financial lending and reporting consumer data ever growing so have the major credit bureaus. Due to the size and massive uploading of consumer info, the amount of complaints and inaccurate information began to pour in. The Federal government and Washington agreed it now became a mandatory requirement to be regulate these Credit Reporting Agencies (CRA). The finalization of the mandatory regulation resulted in the Fair Credit Reporting Act (FCRA) becoming a law to protect consumers from the ever expanding and growing CRA’s. The FCRA was passed to add accountability to the credit reporting process. The credit bureaus were no longer able to capture or collect what they wanted and to not tell consumers what was currently reporting on their credit reports.
The FCRA did not and does not correct and fix all of the continued problems within the credit reporting system. The credit bureaus are larger than ever and have more power than ever. In the beginning of 2016, the three major Credit Bureaus are pushing to pass an exemption status to CROA. a consumer rights bill in which the credit bureaus at that time, strongly supported. The bureaus believe CROA, a nationally governed bill hinders their ability to education consumers yet all licensed credit service organizations are to abide by the law. The bureaus are simply trying to avoid consumer laws once again and profit on uniformed on a massive scale. They are still motivated by making money by selling consumer credit information.
The federal government has forced the credit bureaus to provide consumers with credit reports and are forced to investigate account disputes that are sent in by consumers. These actions are not done proactively on their own. Due to the forced hand that has been placed on them through regulation, the credit bureaus do everything in their power avoid the consumer practices brought up. In one specific action is it especially noticeable – Investigating accounts for credit repair. The credit bureaus have developed and continue to design complex tactics to avoid servicing consumer disputes. These illegal tactics range from nationally marketed, general propaganda, to strong-arm tactics by using consumer information as their protection to avoid responding and services requests. Knowing the history and the motivations behind the credit bureaus should be the core base on understanding the true nature and intent of the credit reporting system and the businesses within. Recent estimates indicate each of the three major credit bureaus, Equifax, Experian and TransUnion, manage approximately 200 million credit files. With the amount of data and information that is reported on a daily basis, errors occur, mistakes happen, it is now important for the general public to be aware that it is your job to fix, correct, question and validate everything reporting on any of your credit reports. It is your right.
With the credit scores becoming increasingly utilized and requested, it was the credit bureaus or CRA’s having complete control over the reporting data and information used to create these scores. The issue with this is simple. The CRA’s make money on selling consumer data, not verifying the validity of the same consumer data. The bureaus are extremely financially motivated to collect information and offer it in the market to sell it. This means that even though the credit bureaus are the definitive source for consumer information, they have zero motivation to morally ensure its completeness or accuracy of the data and information being sold by the thousands each day. They simply absorb the information provided, add it to their digital warehouse and sell it when requested.
Credit, in its simplest terms is a resource granted by a lender in which the lending party does not immediately reimburse the lender and agrees to a repayment plan to the lender at a later date, often times in an amount greater than the initial debt. Credit by itself simply refers to a situation where something of value such as cash, a home, or a vehicle is given in exchange for a promise of payment. When most people think about the term credit, however, they think of a credit rating and whether they have good credit or bad credit.
In today’s credit driven society, credit is necessary because people rarely have the immediate cash available to make large purchases such as a new home. The ability to receive credit is predicated on your credit rating, the more responsibly you have managed credit in the past, based on a lender’s assessment of your credit history, the more credit you can qualify for and the less you will have to pay in interest rates.
When you apply for financing, a credit report is pulled from at least one, or all of the three major credit bureaus. In fact, there are hundreds of smaller “credit bureaus” across the country. Let it be known that most of them are connected and/or affiliated in some way with the big three – Trans Union, Experian, or Equifax. Credit bureaus collect and maintain information on the vast majority of Americans, but they are not affiliated with the government in any way nor is their any legal requirements currently on what is defined as a credit bureau. The credit bureaus are money making corporations which sell consumer data for money.
The credit bureaus receive your personal information through banks and lenders who either approve you for financial terms or who you apply with. In most cases, almost all banks and lenders nationally have contractual agreements with at least one or all three of the credit bureaus. During the terms of a financial obligation with a bank or lender, these banks inform the credit bureaus on everything that occurs in your relationship with the bank on a periodic basis which is defined in their contractual agreement. Credit reports are not just a record of how you are currently managing accounts, it is history of everything that is currently happening and the history of consumers credit actions as well. The credit bureaus collect and store this consumer data and publish it when the information is required which is typically when a consumer is requesting a loan and an inquiry is performed.
What is a Credit Report.
Whenever you apply for any type of credit or financing, a credit report is pulled from at least one of the three major credit bureaus. While there are hundreds of smaller credit bureaus around the country, virtually every credit bureau is affiliated with Trans Union, Experian, or Equifax. These credit bureaus collect and maintain information on the vast majority of Americans, but they are not affiliated with the government in any way. The credit bureaus are for-profit corporations that sell your personal information for money.
The credit bureaus receive your personal information through the same lenders who grant you credit. They have agreements with each of these credit grantors that require the credit grantor to inform the credit bureaus of everything that occurs in your relationship with the credit grantor. If you make a payment late, the negative credit listing is quickly reported to at least one of the three major credit bureaus and is added to your credit history. Credit reports are not just a record of how you are currently managing your credit accounts. Credit reports are histories of everything you are doing with your credit now, and everything you have done in the past. The credit bureaus collect this information, list it on your credit report, and then sell it to credit grantors who wish to see your credit history before they decide to lend you money. The credit grantors who review your credit are especially interested in any questionable credit.
A credit score is a numeric value to a statistical evaluation of information contained in a consumer’s credit report. An ever changing, complex algorithm utilizing consumer history to evaluate risk. Used by lenders, landlords, employers and others, your credit score represents your current financial reputation, risk level and responsibility.
Your credit score is designed as a three-digit number typically ranging from 300 to 850 for FICO™ and 500 to 1000 depending on the system and brand. These scoring systems are designed to evaluate consumer’s data and information in their credit report history and profile to deliver a risk as an overall likelihood of paying bills and loan payments on time. It is a snapshot for creditors,lenders or banks to obtain a numeric representation at that moment of the consumer’s risk. The higher your scores, the stronger your credit report’s history is – The better your score, the less of a risk in the eyes of creditors. Think of your credit scores as the grades assigned to your credit reports.
This numeric snapshot showing the current risk represented to a lender is developed by several parameters in your credit file. Such key factors including length of credit history, number of open accounts, loans, mortgages, public records, and others are formulated to produce a three-digit score between about 300 and 850. The objective is to determine the borrower’s potential risk.
A credit score is a numeric value which predicts your “credit-worthiness” at any given moment. A prediction on a consumer’s likelihood of becoming at least 90 days late on a repayment plan in the next twenty-four months. Credit scores are calculated using complex, mathematical formulas only known by the companies that produce them. In general, these companies have given basic guidance on how they calculate credit scores. In 1956, Fair Isaac Corporation, now known as FICO™ pioneered the credit score system. It was not until the 1980’s that the system was widely used for lending risk assessments.
In 1995, Fannie Mae and Freddie Mac officially recommended the utilization of the credit score system in the mortgage industry. Since 1995 the credit score system and FICO™ have become the most important systematic tool for creditors during assessment on lending credit to a consumer. Variations of credit scores are now used by insurance companies and other service providers in determining approval of services and terms.
What Information is in a Credit Report.
Includes your name, address, marital status, date of birth, number of dependents, previous address, and Social Security Number.
This section has identifying and employment information. It will include full name, spouse’s name, current and former addresses, date of birth, current and former employers.
Merchant Trade Lines
Include all regular credit lines such as department store cards, auto loans, mortgages, and credit cards. History of late payments, trade lines included in bankruptcy, charged offs, or repossessions would be detailed within this section.
When an account is referred to collections because of delinquency or because of a bad check, this appears on the credit report as a collection account. Collection accounts can appear as paid or unpaid accounts. Any type of collection account, whether paid or not, is considered very negative by all credit grantors. Collections are accounts that are seriously past due and have been transferred to a collection agency or creditor’s internal collection department. Collections can appear to be paid and any type of collection whether it is paid or unpaid is negative.
Public Record Information
Public records include bankruptcies, judgments, liens, satisfied judgments, and satisfied liens. All court records, including satisfactions, are considered negative by all credit grantors. The public information section of the credit report includes publicly available information about legal matters affecting your credit. This could include judgments in civil actions, state or federal tax liens and bankruptcies. Because some public record information is accessible only by visiting courthouses and other government buildings in person, the credit bureaus have to send people to the courthouse to gather the records.
A ‘Hard’ inquiry is a reported act in which a potential credit grantor looks at your credit file per consumer’s request. A credit inquiry appears on at least one of your credit bureau reports and at times all three. ‘Hard’ inquiries adversely affect one’s credit score for a 12 month period from the date inquiry was performed. Inquires report on a consumer’s report history up to 24 months, but only affect the score for a 12 month period. The Inquiry section lists details about each inquiry that has been made into the credit history. Details include the name of the creditor or potential creditor who made the inquiry and the date when the inquiry was made.
FICO® vs. Vantage®
How many credit scoring systems are used?
The FICO® brand of credit score is currently the most commonly used score in lending assessments. FICO® is known to have over 80 scoring systems used in a variety of industries across the nation. This does not mean FICO® is the only credit score that is used by lenders. The Vantage™ Score, which has been commercially available for 10 years, is also used in more of a selective lending footprint nationwide.
The FICO® Scoring System
The FICO™ score and lending score or ‘formula’ is only utilized when a consumer applies for a specific thing. A ‘specific thing’ could be: a credit card, auto loan, mortgage loan, cable, cell phone plan, personal loan and the list goes on and on. Lenders are able to access your FICO™ score during your application process. Unfortunately, consumers are not able to access or see their FICO™ score monthly or online. This is because a consumer does not offer credit to themselves. The report model pulled when seeking a specific thing results in a “Hard” credit report pull and inquiry. FICO™ credit report pulls are used for the risk assessment when applying for a loan, a “Hard” pull affects a credit score between 3-18 points, depending on what other factors are in the credit profile.
Payment History | 35%
The largest factor for the FICO™ Scoring model is payment history // 35%. This is due to lenders wanting to know a consumer’s payment history, past and present. This category can be broken down into three subcategories.
Balance To Limit Ratio | 30%
The balance to limit ratio is worth 30% of the FICO™ Scoring system. The most important measurement in this category is called your “credit utilization ratio.” It measures the relationship between your credit card balances and your credit card credit limits.
Length of Credit History | 15%
The average length of open accounts make up 15% of the FICO™ Scoring formula. Having history increases credit scores due to showing active and open account management for periods of time. The longer the reporting accounts have history, the better.
Credit Inquires | 10%
A ‘Hard’ inquiry values up to 10% of the FICO™ Scoring model. An inquiry is recorded when applying for credit. An inquiry is simply a record of who pulled your credit report, and when. Inquires affect your score 3-18 points per pull.
Type of Credit | 10%
Different credit types and variation of accounts make up 10% of the FICO™ Scoring System. Having a balance of both revolving and installment debts will increase your score and overall credit worthiness.