Credit Bureau - Explained
What is a Credit Bureau?
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What is a Credit Bureau?
Credit Bureaus, also known credit rating agencies (CRAs), refer to agencies that collect, organize, and disseminate credit information on individuals and to potential and existing creditors.
Back to: LAW, RISK, & TRANSACTIONS
A Little More on What is the Credit Bureau Definition
In the United States, there are three major personal credit agencies: Equifax, Experian, and TransUnion. Creditors and lenders use these major CRAs to check borrowers credit. The three agencies retail information of over 200 million Americans. CRAs are regulated by the Fair Credit Reporting Act (FCRA) which controls how the bureaus must operate. The Federal Trade Commission in coordination with the Office of the Comptroller of the Currency (OCC) monitors CRAs because they handle critical information on millions of citizens.
The Role of Credit Reporting Agencies
CRAs receive credit-related information from lenders and companies with which customers do businesses with. Lenders report whether their customers are paying their bills on time or not regularly. If an individual has ever been 30 or more days or has defaulted entirely, such information is presented to the CRA. Also, the lenders report the amount that one owes them. Credit bureaus also have access to relevant public records including tax liens and bankruptcy information from local to state courts. Such information is included in the consumers credit report. CRAs sell consumer credit information to third parties, particularly businesses, but only with legally valid reason. For instance, in case a company with whom a consumer has applied for credit would want to take a look at the credit history. Consumers information could also be sold to companies that intend to prescreen the consumer for a particular product or service. Employers and landlords can only access a consumers credit report with the written consent of the consumer.
What Credit Bureaus Don't Do
The only focus of credit bureaus is to provide information and analytical tools to businesses which then use the information to decide on whether a consumer should be given credit and what sort of interest they should be charged. However, the bureaus do not make any decisions.
The Big Three CRAs
1) Equifax - Equifax was founded in 1899, but its reputation was tainted in 2017 when it suffered from data breach after it was hacked which resulted in the divulgence of critical personal information of over 43 million consumers. Since then, Equifax made a tool on its website where individuals can check whether they were affected. The company also attempted to make amends by offering free credit monitoring series among consumers that had their information breached. The company currently protects against credit fraud and identifies theft protection among its consumers. It also offers FICO and VantageScore credit scores that consumer need at a chargeable fee.
2) Experian - Experian was founded in London when businessmen began sharing information on their customers who failed to pay bills, and in 1827, the businessmen formed a group, the Manchester Guardian Society which later became Experian. The company uses FICO 8 credit score calculation system as well as offer Credit Tracker which is available through subscription.
3) TransUnion - TransUnion began as a holding company for a tank car corporation, and later it branched to become an agency for credit reporting. If you think that you are an identity theft victim or you might be, you can freeze your credit report, and TransUnion will take the necessary steps to notify the other CRAs that you have done so. Consumers can also purchase a credit monitoring subscription with TransUnion.
Credit Reporting Agencies are Separate Entities
Although credit bureaus are separate entities, they have business relationships with the same banks, credit card issuers, and other lenders that their consumers might have accounts with. A consumers account history will appear on all the credit reports from these agencies because of their connections, but credit agencies never share their consumers account information with each other. This rule, however, is an exception in the case of fraud alerts and credit freezes. Creditors might report to all the three major CRAs or just one or 2 of them. This means that information contained in the consumer files of the agencies may be different. When lenders and potential creditors check consumers credit, they might pull a credit report from one agency rather than all the three. It is always cheaper for business to check just one credit report.
Some Agencies do Special Reporting
Some CRAs major in particular types of reporting. As such, certain lenders or companies are more likely to purchase such reports from them than others. For instance, some specialize in handling rental histories of landlords while others focus on screening potential employees. MicroBilt/PRBC offers their services predominantly to subprime lenders that are willing to extend their loan offerings to low-income individuals as well as those with poor credit. Innovis also provides data which help consumers confirm their identity for reasons of fraud detection and prevention. Financial institutions such as banks have their own reporting agencies including ChexSystems and TeleCheck that focus on bank account activities. Other agencies are unique to insurance or medical industries. The specialized agencies might not have access to all consumer information concerning credit history, but only obtain data that is pertinent to a particular scope.
Consumers are entitled to see their reports
Every consumer has a right to view their credit reports as well as receive a free report from each of the major reporting agencies at least once a year through AnnualCreditReport.com. Consumers can also get a copy of credit report without any charge if they have been turned down for credit, but the request must be made within the 60 days of being declined. Also, consumers can make additional credit reports purchase directly from any of the CRAs in case they want to check their credit progress more than once a year. Even though Equifax and Experian are separate entities, they offer credit report that includes information for three major reporting agencies in one document. Individuals must purchase their credit score separately from their credit reports. The scores are derived from information in the credit report.
Disputing Information in a Credit Report
Individuals have the right under the Fair Credit Reporting Act to dispute information on the credit report. The CRA has a specific period of time to either substantiate the information on the report or remove it.
Fraud Alerts and Security Freezes
Consumers can also reach out to any of the CRAs to place a credit freeze or fraud alert on their credit report in case they have a reason to believe they are victims of identity theft. When one applies for a credit freeze, they will be blocking access to their report, so they would not be able to apply for credit since the lender wont be able to access the report for reviewing. Credit freezing is always free, and the freezing can be lifted at any time. Placing fraud alert works in the same manner as credit freezing, but alert only remains effective for 90 days. An alert is also free, but a consumer may pay for credit freezing in some states. In case a consumer suspects that there is a problem, it is important to freeze account with all the three major CRAs.
Academic Research for Credit Bureau
- Credit bureau policy and sustainable reputation effects in credit markets, Vercammen, J. A. (1995). Economica, 461-478. This paper discusses how credit markets generate welfare-increasing reputation effects when adverse selection results in borrower reputation formation incentives with address moral hazard challenges. The author notes that welfare that stems from reputation effects declines over time as private borrower information is revealed to lenders. Borrower welfare may, therefore, decrease with time unless reputation effects are sustained. One way to sustain reputation effects is by restricting access of lenders to a borrowers credit history through credit bureau policy.
- Credit Scoring: Statistical Issues and Evidence from CreditBureau Files, Avery, R. B., Bostic, R. W., Calem, P. S., & Canner, G. B. (2000). Real Estate Economics, 28(3), 523-547. This article discusses the relevance and effect of credit scoring on the reputation of borrowers. The author asserts that although credit scores is beneficial to both lenders and borrowers, it raises significant statistical issues which can affect the ability of scoring systems to accurately quantify the credit risk of a consumer. A sample of credit-bureau records have been used to show the concerns about omitted-variable bias. Local factors have also show significant correlations with the credit scores.
- Predictive value of credit bureau reports, Chandler, G. G., & Parker, L. E. (1989). Journal of Retail Banking, 11(4). According to this article, almost all creditors use reports from credit bureaus to evaluate credit risk of new applicants. Most of the time, they do not know the real predictive value of the credit reports information. Few of them are always aware of fact that variation in the predictive value of the reports varies with the level of the detailed examination. The author further denotes that understanding this information is critical in designing a more accurate credit-risk evaluation process and in determining the value of the reports compiled by the bureaus. Consequently, the article measures the predictive power of information from credit bureaus with or without application information. In addition, the article measures changes in the predictive power as reports become more detailed. Findings have been presented for a retail revolving card, a bank card, and a nonrevolving card.
- Assessing credit card applications using machine learning, Carter, C., & Catlett, J. (1987). IEEE expert, 2(3), 71-79. This article discusses the process of credit card assessment and how it influences credit card application. Credit assessment refers to the process of predicting applicant profitability and reliability. The author has adopted a machine learning approach to understand and how credit card assessment is conducted. Using Quinlans ID3 algorithm was found plausible due to the fact that the approach does not require any domain-specific knowledge and is a cheaper and quicker approach than building an expert system using conventional approach. Finally, the author speculates the future techniques and financial applications of credit card assessment.
- Monitoring the Household Sector with Aggregate Credit Bureau Data: A New Source of Data Provides a Firmer Foundation for Credit Analysis and Decisions, Barron, J. M., Elliehausen, G., & Staten, M. E. (2000). Business Economics, 63-76. This paper illustrates how aggregated credit bureau data can be used to benchmark portfolio performance and modeling trends in the case of household borrowing and payment behavior. The authors utilize a database build from a sample of US consumer histories dated back to 1992. The comprehensive data used provide an accurate picture of borrowing behaviors at different levels including local, state, and regional levels compared to aggregate statistics that are available from the industry association and the federal government. The data used also has a predictive power which is apparent in models used to explain county-level patterns in personal bankruptcies. Further, the author associates the relevance of the data with 3 types of consumer loan delinquencies witnessed between 1993 and 1998.
- The use of credit bureau information in the estimation of appropriate capital and provisioning requirements, Falkenheim, M., & Powell, A. (1999). Central Bank of Argentina, mimeo. This article by Michael Falkenheim and Andrew Powell discusses the use of credit bureau information to estimate the appropriate capital and provision requirements. In-depth information has been provided on the primary roles of credit bureaus in collecting information on the larger debtors of financial systems and understanding those debtors including their risks. The authors also elaborate on how the bureaus have become powerful tool for sharing information between financial institutions at affordable costs. Furthermore, the bureau databases have been used to study the relationships between lenders and borrowers. Thus, the authors have used a simple technique to estimate the losses and potential losses variance of portfolio in the context of Argentine loans. They advocate for provisions and capital requirements to cover potential losses subject to some statistical level of tolerance.
- Household debt and defaults from 2000 to 2010: Facts from Credit Bureau Data, Mian, A., & Sufi, A. (2015). (No. w21203). National Bureau of Economic Research. This study reviews existing literature and offer evidence that support the view of credit supply which holds that increasing credit supply that is unrelated to fundamental improvements in productivity or income was the shock that caused the household debt boom and bust. This credit supply boom, according to the authors, has been supported by 4 theories: expansion of mortgage credit supply between 2002 and 2005 which was independent of economic circumstances; mortgage credit supply expansion which increased house prices; response of homeowners to the rising housing prices by borrowing out of home equity; and the fact that default crisis resulted from lower credit score individuals.
- Information sharing in credit markets, Pagano, M., & Jappelli, T. (1993). The Journal of Finance, 48(5), 1693-1718. This article presents a model with adverse selection as it shares information among lenders endogenously. According to the authors, the model reveals that there is a positive relationship between lenders incentive to share information about borrowers and the mobility and heterogeneity of the borrowers. The model also found that level of sharing information has a positive correlation with the size of the credit market and advances in information technology. Further, the model revealed that information sharing among the lenders increases with the volume of lending when there is severe adverse selection which makes safe borrowers to drop out of the market. These findings have been supported by historical and international evidence in regard to the consumer credit market.
- The impact of the functional characteristics of a credit bureau on the level of indebtedness per capita: Evidence from East European countries, Simovic, V., Vaskovic, V., Rankovic, M., & Malinic, S. (2011). Baltic journal of economics, 11(2), 101-130. This paper discusses the role of credit bureau in credit assessment. It outlines the role of credit bureaus in controlling indebtedness levels of populations. According to the authors, credit bureaus have key functional characteristics that influence the development of indebtedness. To prove this assertion, the authors attempt to identify the key characteristics of credit bureaus as well as quantify the characteristics and identify the casual relationships between credit bureau characteristics and indebtedness trends. The Credit Bureau Functional Index has been introduced as a quantified value that reflects the characteristics of a credit bureau. Consequently, a correlation between index and indebtedness per capita is established.
- The reaction of consumer spending and debt to tax rebatesevidence from consumer credit data, Agarwal, S., Liu, C., & Souleles, N. S. (2007). Journal of political Economy, 115(6), 986-1019. Using consumer credit data, this study presents the reaction of consumer spending and debt to tax rebates. The authors apply new credit accounts panel data set to analyze how consumers respond to tax rebates with respect to the 2001 federal income tax rebates. A monthly response of credit card payments, debt, spending, and unique exploitations have been estimated including randomized rebate disbursement timing. It is found that consumers initially saved some of their rebates due to increased credit card payments, thus, paying down their debts. However, their spending increased afterward, a phenomenon that was contrary to the model of canonical permanent-income. It is further revealed that spending among liquidity constrained consumers increased, whereas there was a debt decline among majority of unconstrained consumers. These findings suggest that there are important dynamics that influence consumers response to lumpy increases income such as tax rebates and liquidity mechanisms.
- Better Lending and Better Clients: Credit Bureau Impact on Microfinance, McIntosh, C., Sadoulet, E., & de Janvry, A. (2006). BASIS, Madison, WI Brief, 45. This paper provides a comprehensive review of the role of credit bureau on microfinance. The authors reveal that, based on administrative records, credit bureaus has large impact on microfinance and loan performance. Before the introduction of bureau, individual and group loans in arrears was not stable and group loans were the ones dominating the lending market. However, after credit bureau information became common among credit agents, the number of individual loans with at least one lay payment reduced from 67.2% to 52.8%.