Credit reporting is big business. And it is a very profitable business earning in excess of $1 billion a year. Credit reporting as an Organized business came about as a result of lenders needing a way to measure a clients creditworthiness. Years ago, this wasn’t a very necessary service. People didn’t move around the country much and generally did all or most of their business at their local bank. But, like in many areas of our lives, progress has changed and complicated this banking relationship.
The advent of computers allowed for new credit instruments like credit cards to come into existence. They also allowed banks and other companies to communicate with each other and to transfer money and information back and forth easily and quickly. Also during this revolution, people became more mobile, moving from one part of the country to another with little more thought than packing the car and going. Lenders now needed a mom effective means of determining an individuals credit history.
To service this need, several large companies set up credit reporting bureaus. With just a few central repositories of data and several branch offices, any lender could find on( all about your credit history with a simple phone call. A lender could also update your credit report at these credit bureaus to reflect the current status of your loan with them.
The Big Three Credit Reporting Agencies
Currently, there are three credit reporting agencies that cover everyone in the country. They are TRW, TransUnion, and CBI/Equifax. Each company is dominant in certain parts of the country. What this means is that every lender, big and small, in a certain region of the country uses one agency, say TRW, for all their credit information gathering transactions.
For bigger loan transactions, or when someone just moved from another part of the country, creditors will pull an additional report from another credit bureau to be sure they get an accurate picture of your credit history. The same scenario is true for when you are late with payments, in default, etc. If it is a small loan, this negative information is generally reported to just the dominant credit reporting agency in that region. If it is a large loan, such as a house loan, that is affected, it will be reported to all three credit reporting agencies. As you now probably realize, credit reporting agencies are nothing mom than repositories of information about you. When they receive information about you, whether it be positive or negative, it goes into your credit file.
Whenever they get a request for information about you, they send the information in your credit file to the requester. This is both good and bad. It is good that lenders have a standardized source to measure the risks before granting a loan. It is bad because the data is never checked for validity. If incorrect information is entered, it is assumed to be correct until the credit reporting agency is told by you that this is incorrect. Only at this point, will they take steps to verify its validity.
How Credit Reporting Agencies Operate
Credit reporting agencies work with creditors on a subscription basis.
For an annual fee, a creditor (lender) has access to the credit reporting agencies databases. This allows a creditor to both get credit information on you and also allows them to post credit status on any loans you have with them.
Typical information on a credit report includes:
- Bank credit cards (Master Card, Visa, American Express, etc.)
- Retailer credit cards (Sears, Macy’s, Etc.)
- Student loans
- House loans
- Other types of loans
Additionally, it is common to see the following information on your credit report if you are in default:
- Utility bills (phone, electric, etc.)
- Rent payments
- Medical bills
- IRS Liens
- Property tax bills
- Attorney’s bills
- Other suits and judgments against you
Each persons credit information is stored by his or her social security number. When a creditor requests or reports information, the credit reporting agency uses your social security number to work with the correct data. This is why many community protection groups advise against you giving out your social security number to too many people. With it, someone else can get your credit report via computer and use that information to commit fraud (and have the undesirable side effect of damaging your credit report and your creditworthiness).
This system, unfortunately, has many imperfections. There are not enough checks and balances to guarantee the integrity of the data. Each entry has the potential for human error at any point in the reporting process. The person applying for credit may accidentally put down the wrong social security number. The person at the lending institution may make a typing error and enter the wrong social security number or check off an incorrect field in the report, making your payment late instead of on time. These simple mistakes that occur because we are less than perfect can have a very devastating effect on you, One of these errors could cause you to get rejected for a car loan or a home mortgage.
Fortunately, all of these types of errors can be easily repaired. Unfortunately, it can take up to two months (or more) from the time you discover them till the time you can get them removed from your credit history. There is no way to protect yourself from these errors or from people committing fraud with your social security number. The only defense you have is to actively work to keep your credit report clean. Every year, get a copy of all your credit reports and examine them. If they have incorrect information on them, take steps immediately to get these items repaired or removed. A clean, positive credit report is a very valuable resource in your financial life. Protect it and keep it clean and it will serve it well when you most need it.
Additional Credit Reporting Agency Services
As credit reporting agencies grew in sin and completeness, they have added several additional services to clients based on the information they have about you. They offer the following additional services (with mom services being added all the time):
- Prescreening – Many of us receive credit card offers saying that we are pre-approved. This happens via a process called prescreening. The creditor gives the credit reporting agency a list of criteria for granting credit. The credit reporting agency matches this list against all of the people in its database and provides the creditor with a list of the people matching the creditor’s prescreening criteria.
- Targeted marketing lists – Since the databases generally contain some information about our income and spending habits, many companies make use of this information to send you sales catalogs and other mail offers.
- Consumer ratings – At a creditor’s request, a credit reporting agency will give a rating of how good a risk they feel a customer will are based on the customer’s payment history, etc. in the credit report.
- Collections – Many credit reporting agencies are now offering to perform collection duties for creditors.