There are three major credit bureaus in the United States. These are Equifax, Experian, and Transunion. The credit bureaus are also known as credit reporting agencies or CRAs. Contrary to popular belief, the government does not own credit bureaus. They are for-profit, publicly-traded companies. Understanding who the credit bureaus are, what their purpose is, and how they earn a profit is important to you as the consumer because the knowledge may help you learn how to earn better credit.
Credit bureaus provide information to creditors and lenders to help them make important lending decisions. Credit bureaus collect credit information to make it available to certain third parties companies. Their credit limit lies with the lender or creditor.
What is a Credit Bureau?
A credit bureau is also called a credit reporting agency, or CRA. It is a company that collects data about how you manage your credit and finances. The credit bureau then puts the data into a simple report. It will sell your report to others (such as?) who have permission to view your credit information under federal law.
Credit bureaus assign credit scores to individuals based on the credit history they assemble.
Credit scores are important predictors of whether or not you will qualify for credit and on what terms if approved.
Credit bureaus do not decide if you get credit. They collect and synthesize information regarding your credit risk and give it to the lending institutions.
How do Credit Bureaus work?
Credit bureaus associate with all types of lending institutions and credit issuers to help them make loan decisions. Their primary purpose is to ensure creditors will have the information they need to make lending decisions. Typical clients for a credit bureau include banks, mortgage lenders, credit card issuers, and other personal financial lending companies.
The Purpose of the Credit Bureaus
CRAs are responsible for creating your credit reports. First, CRAs collect information about consumers from businesses known as “data furnishers.” Data furnishers are lenders, credit card issuers, or collection agencies who provide information about the account management habits of consumers to CRAs.
The credit bureaus do not pay data furnishers to provide them with information about consumers. Once CRAs receive account information from a data furnisher, they will store the information on their servers so that the data may be included on your credit report that the CRA hopes to sell at a later date.
The Credit Bureaus Are Not Partners
A common myth is that the CRAs work together or are business partners. The three major CRAs are fierce competitors that strive to gain more of the available market share. Each CRA wants to own the most complete and accurate consumer credit data available to gain a competitive edge over the others.
How Do Credit Scores Work?
A consumer’s credit score is based on the information in their credit report. It is a way to measure their projected reliability in paying back car loans, credit-card balances, mortgages, and other lines of credit.
The CRAs use the FICO (Fair Isaac Corporation) score that started in 1958 and remains the most common. Another credit score is the VantageScore, which started in 2006. They both have the same scoring range from 300 to 850.
Rules Followed by the Credit Bureaus
The Fair Credit Reporting Act (FCRA) is the primary law that regulates credit bureaus. It tells them what they should do as they collect, compile, and sell your credit information. The law protects you from unfair credit reporting practices.
Where did the Credit Bureaus get Information From?
- Information reported through the creditors.
- Information shared within the bureaus.
- Information bought by the bureaus.
Information reported through the creditors
Banks and credit card issuers report information about their accounts and customers to the credit bureaus.
Information bought by the bureaus
The credit bureaus buy data for information. For example, a credit bureau might buy public records information from another credit bureau, and record this for generating a consumer’s credit report.The bureaus may also buy government tax liens or bankruptcy records.
Information shared within the bureaus
The credit bureaus will share information among themselves. For example, when someone places an initial fraud alert with one of the bureaus, it should be forwarded to the other two bureaus.
Who uses the Credit Report?
Creditors send information to the credit bureaus and often purchase credit reports and credit scores from the bureaus.
The bureaus use the credit reports and credit scores to determine whether to approve or deny an application and the interest rates on loans and credit cards they approve. Credit reports and scores help in determining the likelihood that someone can repay a loan and, by extension, the risk associated with lending to that person.
Creditors regularly purchase credit reports and scores for their current customers. They may decide to close your account, or raise or lower your credit limit, based on changes in your credit report.
Are There Other Credit Bureaus?
Even though there are three big credit bureaus, there are some lesser-known credit bureaus.
- Experian Rent Bureau
- LexisNexis CLUE
- National Consumer Telecom & Utilities Exchange
How Do the Credit Bureaus Profit?
Collectively, the credit bureaus earn billions of dollars per year. This profit comes from a multitude of products and services which each CRA sells. The following is a list of a few of the ways the CRAs earn money.
Credit bureaus sell four data products
- Credit Services.
- Decision Analytics.
- Marketing Support.
- Consumer Assistance Services.
Some of the credit services include:
- Selling your information to lenders.
- Selling your information to marketers.
- Selling you your own information.
Selling Your Information to Lenders
The primary way CRAs make money is by selling your credit information to lenders, insurance companies, and other businesses who have a permissible purpose to access your credit reports. A multitude of companies relies on information purchased from the CRAs to help predict the risk of doing business with consumers. Accurate credit information is a useful tool that may help lenders to make better decisions that can help companies to earn more profit.
Selling Your Information to Marketers
Another way that the CRAs earn a profit is by selling your credit information to marketers. The Fair Credit Reporting Act (FCRA) allows a credit bureau to sell your credit information to lenders or insurance companies who may wish to send you a “firm offer of credit or insurance.” This process is also known as prospecting.
If you received a “pre-approved” credit card offer in the mail, then a CRA sold your and a list of other consumer’s credit information to a lender without your knowledge. Having your credit information sold in this manner will not hurt you or damage your credit scores. If you wish to stop the CRAs from selling your information for prospecting purposes, you may visit OptOutPrescreen.com to make the request.
Selling You Your Information
The CRAs all maintain information about you and your credit management habits and you may purchase a copy of your credit reports from them, despite not being their target customer. Each of the 3 CRAs allows you to purchase your credit reports, monthly credit monitoring services, and other consumer-specific products online.
It is important to note that the credit bureaus must provide you with a free copy of your credit reports each year as part of a requirement enforced by the Fair and Accurate Credit Transactions Act (FACTA). It is up to you to claim your free reports by visiting AnnualCreditReport.com.
Credit bureaus will provide lenders with augmented credit reports. These reports include a detailed transaction history and analytics about the ways an individual handles debt. Lenders pay more for these reports.
Lenders send out their direct marketing materials targeted to customers who are pre-approved for credit and credit bureaus provide them with a list of candidates for these marketing campaigns.
Credit bureaus offer services like
- Credit monitoring.
- Identity theft.
- Fraud prevention.
These services are increasingly important because the risk of identity theft is higher.
You may protect your credit by asking each bureau to freeze your credit. It’s free to freeze your credit (and to unfreeze it when you want to apply for something), and it won’t hurt your score.
The CRAs earn money when you dispute inaccurate items on your credit reports despite not publicizing this fact.
Whenever you dispute an account appearing on your credit report, the CRA charges the data furnisher a nominal fee. Although the pre-dispute fee is low, it may add up to thousands of dollars per month for a collection agency or lender, depending upon the company’s size and the number of consumer disputes it receives from the CRAs every month.
How Do I Check the Three Credit Reports?
The Fair Credit Reporting Act makes it so you are entitled to at least one free credit report from each bureau every year. Requesting a copy of your own credit report will not hurt your credit score in any way.
By reviewing your credit report, you can fix errors that may improve your credit score. A good or excellent credit score is the best way to get approved for loans you want at the best interest rates available.
Why Do Credit Reports Differ by Agency?
Your credit reports look different from all of the three credit bureaus because the three credit bureaus are independent and they don’t share information or communicate with each other except in the case of fraud.
If an error appears on multiple credit reports, you must file a separate dispute with the three major credit reporting bureaus that are reporting the misinformation.
Why would the information be so different?
It is possible that one credit bureau might have unique information captured on a consumer that isn’t captured by the other two bureaus.
For example, Experian specializes in providing marketing services for businesses for use for pre-approved credit card offers, Equifax works with corporate credit analysis, and TransUnion focuses on analyzing credit information on Americans living abroad.
The credit bureaus do more than create and sell credit reports. Credit reporting is the major part of their business, and their services and offerings revolve around gathering and analyzing consumer data.
The credit bureaus are important but they don’t control every aspect of your finances.
Credit bureaus don’t assign your credit scores, approve or deny applications or decide which accounts you will open or how you will manage your credit obligations. The credit bureaus know what they are allowed to do and not do. These laws and regulations protect you and help you keep your credit in the best shape possible.