Credit Reporting Agencies
In the old days, credit reporting agencies didn’t even exist. If somebody went to the bank and applied for a loan, the bank would implement their own screening process that didn’t involve an outside agency. This screening process worked particularly well in small towns where people all knew each other. However, as the population increased and more people were not honoring their debt obligations, financial institutions and merchants started keeping track of people who could be trusted with debt and those who could not. They then shared these lists with each other and it eventually caused credit groups to form. These groups started as non-profit companies but then they turned into the for-profit ones that we have today.
Credit report agencies, which are also called credit bureaus, are in the business of collecting the credit details of consumers and then selling those details to third-party businesses. These businesses receive the credit details in something that is called a credit report. For example, when you go to a bank and apply for a loan, the bank is going to request a credit report from at least one of the three main credit reporting agencies. These three agencies are TransUnion, Equifax, and Experian. They are all federally regulated credit agencies but they are separate agencies which work independently from one another. Based on the reports each one provides, the bank will decide whether to approve you for the loan.
How Credit Bureaus Work
Each credit bureau has its own consumer financial data that might look different than the financial data kept by another credit bureau. You see, creditors are the ones who submit credit information about consumers to these agencies. These creditors are usually banks, credit card companies or some other company that loans money to consumers. These creditors could also be non-financial companies that are simply owed money from the consumer. Some examples of these companies include electric companies, water companies, doctor’s offices, and landlords.
If any of these companies do not receive the payments that they are owed, they have the option of reporting this unpaid debt to one or more of the credit bureaus. From there, the credit bureaus will place this information on the credit reports of these consumers. Then if any future companies or creditors inquire about these consumers’ credit history, they will see those negative marks about unpaid debt on there and will possibly turn them away for a loan or new account.
There is some good news for people who are honorable and pay their bills on time. Unlike consumer reporting agencies which only keep track of negative information, credit bureaus actually keep track of both positive and negative information. This means if you have a long history of making your monthly payments on time to your creditors, then all these payments will be reflected on your credit report and it will increase your overall credit score too. As a result, you will have a better chance of being approved for a loan with a low-interest rate.
Even though credit bureaus are for-profit companies which sell credit reports to businesses, the Fair Credit Reporting Act entitles consumers to receive one free copy of their credit report each year. That way, they can monitor the information on their own credit report and then dispute it if they find something that they feel is incorrect. Since each of the three credit bureaus falls under federal authority, you are able to request a free copy from each credit bureau. This will help you in comparing the similarities and differences between the information that is on them.
What’s the Difference Between Equifax, Experian, and TransUnion
Many people do not understand why there are three main credit reporting agencies and not just one. Remember, these are all for-profit companies that are competing against each other. There are many lesser known credit reporting agencies too, but they are not used nearly as much as Equifax, Experian, and TransUnion. Despite these three agencies having the same purpose, the way they collect information and generate credit scores is actually quite different from one another.
For example, Experian calculates credit scores using their own FICO Risk Model. TransUnion uses their own model called the VantageScore and Equifax simply has a scoring system by the name of Equifax Credit Score. Because their methods of calculations are different with each system, the credit score they generate will be different. Also, it matters how much information was reported to them by creditors. Perhaps a creditor had reported bad information about a consumer’s unpaid debt to just one credit bureau and not the other two. This will obviously create a huge gap between these credit scores because they are based on different financial data.
The Fair Credit Reporting Act places restrictions on all these bureaus in how they gather and distribute people’s financial information. Therefore, the only real way these agencies are able to compete with each other is by improving the features of their own services to consumers and businesses. This could involve making it easier for their customers to access their credit reports or providing outstanding customer service to them. Those who elect to purchase a monthly service with one of these bureaus may be given a discounted rate that competes with the rates of other bureaus. As long as the bureaus are abiding by the rules of the Fair Credit Reporting Act, they are going to act like businesses and implement marketing strategies that are competitive in order to obtain customers.