What is a Credit Bureau?
A credit bureau refers to an organization that collects information related to credit for individuals and sells the information to creditors for informing lending decisions.
What Do Credit Bureaus Do
Credit bureaus are specific organizations that partner with all types of lending intuitions and creditors to help them in their lending decisions. Lending institutions are organizations – such as banks and credit unions – whose business model is to take money from depositors, paying them a certain interest rate.
Then, the lending institutions will lend out a portion of those deposits at a higher rate for a profit. However, the lenders need to ensure that their borrowers possess adequate credit quality so that they do not default on the loans that they take out.
The three primary credit bureaus within the United States are:
However, many smaller bureaus provide credit information as well. As mentioned earlier, lending institutions require credit information to decide whether their borrowers are creditworthy.
If a borrower appears to be less creditworthy, they may be denied loans, or they will be charged a higher interest rate to compensate for the additional risk. Conversely, borrowers who are very creditworthy will be charged a lower interest rate since they pose less of a risk to the lender.
It is worth noting that credit bureaus do not make the decision of whether or not credit will be extended to an individual or not. They simply collect and synthesize the information for the lenders to use in making their decisions.
Credit bureaus sell the information to lending institutions for a fee; also, they will sell credit information to individuals who wish to know about their own credit history.
Credit bureaus acquire information relating to credit from various sources, including other creditors, debtors, debt collection agencies, credit card companies, or other offices with public records on credit-related information. The information is collected and synthesized from the three primary credit bureaus – Equifax, TransUnion, and Experian.
Credit bureaus usually focus their attention on credit accounts (accounts where an individual owed money to another organization). However, some credit bureaus may go further in acquiring payment information on bills, payments, and rent. The credit bureaus will consolidate the information into a comprehensive credit report.
A credit report represents a detailed breakdown of the credit history of an individual. Typically, the report will include personal information, such as addresses, Social Security number, and employment history. The report will then break down the summary of bank accounts and credit card accounts that are in good standing or past due. It will also include information on the accounts, including the balances, limits, and dates of opening.
Credit reports will also include the details of accounts turned over to credit agencies, such as wage garnishments, for example. The credit report will retain negative information for seven years.
A credit report will also include an overall credit score that is calculated by the credit bureau. It is a single figure that represents the creditworthiness of an individual. In the U.S., the most common credit scores are known as FICO scores.
No single way exists to calculate a credit score, and credit bureaus use a range of methodologies to calculate individual credit scores. However, the credit bureau will disclose the methods and weighting that goes into the calculation of their credit score.
A credit score will be a number that ranges from 300-850 and is associated with an individual’s creditworthiness. A score of 850 represents an individual with very high creditworthiness, and a 300 represents an individual with very low creditworthiness. Credit scores are important information used by lenders to make their lending decisions.
Many factors go into the overall credit score, namely:
- Total levels of debt
- Repayment history
- Number of open accounts
Regulation of Credit Bureaus
In the United States, credit bureaus are also known as consumer reporting agencies (CRAs). Credit bureaus are very important institutions within the finance world due to the transparency and information that they provide. Lenders, such as banks, are important institutions within the economy, and they require accurate credit information in order to run their operations effectively.
The U.S. enacted the Fair Credit Reporting Act in 1970, which regulated credit bureaus and their use and the interpretation of data to protect individuals from misleading or harmful information on their credit score reports.
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful: