Credit Reporting - An Overview

The first step to understanding credit reporting is to understand how credit information is gathered from consumers. Where does the information come from? Who has access to it? What is a credit bureau and how do the various bureaus differ?

In brief, credit bureaus are businesses that maintain files on basically every consumer - 18 years and over - who has ever had some type of credit obligation, such as a loan or a credit card. Credit files contain a myriad of information, including the amount of credit debt a consumer has accumulated, the type of debt and payment history. When requested by a potential lender or creditor, this information is collected and packaged into what is known as a credit report. Lenders and creditors use the information from the credit report to supplement any applicant information they have gathered, in order to make an informed decision about a consumer’s creditworthiness.

The first credit reporting “bureaus” in all likelihood consisted of cooperatives of community retailers formed to share information about consumers. These banks, stores or finance companies tracked and shared the buying and repayment habits of their customers, with the focus primarily on derogatory information. By the mid-1950’s, independent, geographically centered bureaus were established. However, information exchange was limited by the inability to effectively transmit large amounts of data. The advent of computers revolutionized the credit reporting industry by making it possible to transmit information over a greater geographic distance.

Consolidation is another factor that played an important role in shaping today’s credit reporting industry. As larger companies absorbed or partnered with smaller credit bureaus, they were able to offer even greater national coverage.

Today there are three national credit bureaus that dominate the industry: Equifax®, Experian®, and TransUnion. Each bureau owns or is affiliated with hundreds of previously independent local credit bureaus. However, there are still many smaller regional credit bureaus that have no relationship with the three major bureaus. The credit reporting industry currently generates between $3 and $4 billion in annual sales. The credit bureaus estimate that approximately 1.3 billion credit reports are run each year, and each bureau, on average, maintains approximately 225 million consumer credit files.

Credit bureaus collect information on consumers from lenders such as banks, credit card companies, department stores and even collection agencies. The bureaus also draw information from public records to provide additional details regarding bankruptcies, judgments or liens. Any company that makes lending decisions, or manages financial accounts, can voluntarily report back to the bureaus, and the bureaus are always soliciting information from these types of companies.