What is a Credit Bureau?

If you’ve had any experience with credit, you’ve probably heard the term “credit bureau.” It may have been when a potential lender informed you they were going to pull your credit report from a credit bureau, or you heard that it’s a good idea to check your credit reports with the credit bureaus at least once a year, or maybe you watched a news story about one of the credit bureaus experiencing a data breach.

But what exactly are these mysterious entities, also referred to as “credit reporting agencies” or “consumer reporting companies,” and what do they do? Understanding these agencies and how they work could prove useful in managing your credit, because credit bureaus play a significant role in the credit industry.

Three Major Credit Bureaus

The Consumer Financial Protection Bureau’s 2019 list of consumer reporting companies contains over 50 entries. Most of these companies concentrate their efforts in specialized areas, such as employment screening, tenant screening, medical, and insurance, to name a few. When it comes to nationwide consumer reporting, however, there are three main credit bureaus: Experian^®, TransUnion^®, and Equifax^®. And when you apply for a credit card or loan, potential lenders typically work with one, two, or all three of these credit reporting agencies to help them make more-informed lending decisions.

What Credit Bureaus Do

Credit bureaus don’t actually make any credit decisions or recommendations on whether you should be granted credit; that’s up to the lender. What they specialize in is collecting, storing, and providing information that helps creditors minimize their risk in making lending decisions. This information is conveyed through credit reports, which reflect current and past credit activity, and credit scores, three-digit numerical scores designed to express the creditworthiness of consumers.

When you apply for credit, a potential lender will typically request a copy of your credit report and credit score from the credit bureau or bureaus of their choice. Your score and history with credit, as expressed by your reports, will likely factor into their decision to approve or deny your application for credit. There are other determining factors as well, such as your income, but the information provided by the credit bureaus is usually instrumental in making lending decisions, which is why many lenders are willing to pay for it.

Where do Credit Bureaus Get Their Information?

The three main credit reporting agencies get their information from many of the very companies that utilize their services. These companies include credit card issuers, banks, credit unions, mortgage firms, and more. You may think that, in order to ensure there’s enough information to make the system work, there’s a law requiring these companies to furnish data on their consumers.

But there isn’t.

Credit bureaus are private entities, not government agencies, and there are no laws mandating that a company must report data on their consumers to the bureaus. While there are laws under the Fair Credit Reporting Act that regulate which information is reported and how it’s reported, actually reporting consumer information is strictly voluntary.

So why would companies bother to provide this information? After all, it’s surely time and labor intensive to keep and deliver such detailed records, right? In a word—or Latin phrase, rather—it’s all about quid pro quo.

quid pro quo - something for something (you scratch my back; I’ll scratch yours)

Companies voluntarily submit consumer data because the information the credit bureaus provide by consolidating this data into credit-report form is extremely valuable. Remember, this information helps creditors to minimize risk by making more-informed lending decisions.

The credit bureaus gather other information as well. They collect public records, such as bankruptcies, which are also of interest to many potential lenders. It’s worth pointing out that there are certain things credit bureaus cannot include in your credit reports, including your age, race, sex, education level, income, or any other personal information that could potentially be used to discriminate against you.

How Long Have Credit Bureaus Been Around?

The history of credit bureaus traces all the way back to 1803, when a group of English tailors began to share information with each other about customers who didn’t pay their bills. Equifax has been around in various forms for over a century; it was founded in Atlanta back in 1899 as the Retail Credit Company. TransUnion started out as a railcar leasing company and entered the credit-reporting game in the late 1960s. Experian, as it is known today, was formed in 1996 when the U.K. retailer GUS acquired TRW Informational Services, which was the largest credit bureau at the time.

Mistakes Can Happen

Given the sheer volume of information credit bureaus handle—over 200 million files at each of the big three—mistakes are bound to happen. But if there’s a mistake in your credit report that paints you as a higher risk to potential creditors than you actually are, it could adversely affect your ability to get credit or receive more advantageous interest rates and terms. So if there are any inaccuracies or errors in your credit reports, you’re going to want to contact the credit bureaus to fix them.

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