The system of obtaining and granting credit in the U.S. is built on a long history of credit reporting agencies determining credit worthiness through an ever evolving system of standards. Today, three major Credit Bureaus — Experian, Equifax, and TransUnion, also known as Consumer Reporting Agencies (CRA) follow a strict method to deliver assessments of credit worthiness to a variety of customers.

Purpose of The Credit Bureaus

The number one role of these credit bureaus is to collect and analyze consumer financial data and disseminate it to appropriate customers. Each agency uses a credit analysis methodology built on standardized, qualitative measures to assign a credit score. The most popular method is the FICO score, which comes in a variety of formats and emphasis depending on specific customer requirements.

To obtain the score, the credit bureaus collect financial data from data providers such as creditors, debt collection agencies, vendors, and public record offices. After assessing credit scores and compiling credit reports, they provide this information to banks, mortgage lenders, credit card companies, and the consumers themselves.

Each consumer has access to a free copy of his/her individual credit report to see where they rank and to look for mistakes or discrepancies. Providing this kind of information to customers helps retain the legitimacy of the credit determination process in all aspects of the cycle: creditor, reporting agency, and lender.

The existence of credit bureaus may seem like a nuisance to many, but they are actually here to protect both the consumer and the lender by providing accurate, up-to-date information on where we stand individually with our credit worthiness. Credit scores are valuable pieces of information that allow us each to be defined by standardized, qualitative measures concerning our credit, instead of subjective, often prejudice-filled decision factors of the past.

How The Credit Reporting Agencies Began

There wasn’t always such a thing as a credit score. In fact, before 1970 when the Fair Credit Reporting Act was passed, assessing one’s financial credibility was largely subjective. The origins of the three major credit bureaus we know today – Equifax, Experian, and TransUnion, all began as credit bureaus that each assessed credit using very unregulated standards.

The birth of credit came thousands of years ago in regions where credit was needed for agricultural purposes. It experienced a ban for a while, but then made a comeback in the 19th century with a group of English tailors who shared information on who paid their debts. This method of information sharing made its way over to the United States, and transformed into a business of sorts.

Equifax is the oldest of the three major credit bureaus we use today. Equifax can trace its beginnings to 1899 when it was originally called the Retail Credit Company. It was founded by the Woolford brothers, who kept a list of people they deemed as creditworthy. They used agents called the Welcome Wagon in different towns who assessed the financial position of newcomers there. The Retail Credit Company made money by selling their lists to businesses considering extending credit to certain individuals.

Before the Fair Credit Reporting Act of 1970, credit bureaus, of which there were many in the United States, kept their lists of consumers and their corresponding creditworthiness assessments all on index cards. Imagine how quickly today we can obtain information about our own credit compared to the wait time that must have been necessary during that time period.

All those index cards probably meant a few of them were lost here and there, and many mistakes from human error were involved. Luckily in the 1960’s, the U.S. Association of Credit Bureaus decided to move their data to computerized systems. Although, we still suffer from error in credit reporting, the effort to keep data clean and accurate is not quite so daunting.

In fact, before the U.S. Association of Credit Bureaus started investigating computer storage options, another company called TransUnion kept nearly 3.6 million consumer data cards in over 400 filing cabinets. All those cards helped establish TransUnion as one of the three major credit reporting bureaus still in existence today. (They actually started out as railroad leasing company that in 1969 decided to buy one of the many credit bureaus in existence.)

What once was an incredibly subjective experience finally witnessed some real transformation into a quantitative, standardized way to measure credit worthiness. Although it’s not flawless, it’s a huge improvement on the old system that often refused to give credit to people who were actually more than capable of handling it.

Decades ago, there was a good chance you could walk in a bank and be refused credit, despite your lack of bad debt, all because the loan officer didn’t like that you were female, or a different ethnicity, or elderly, and so on. And, although unfair lending practices is still a problem we must continue to battle, the amount of discrimination and prejudice in lending was astronomically higher before 1970.

One of the biggest credit reporting agencies of the 70’s and 80’s was TRW, which happened to actually be a part of a defense conglomerate. TRW was often used as a replacement for the “credit score” term because it was such a popular brand. Some would say, “Let’s pull a TRW,” to find out how credit-worthy someone was. Experian bought TRW out during that time frame, and remains a huge player today.

Closing Thoughts – New Challenges

As technology plays an increasing role in our lives – for better or for worse – the vulnerabilities our data has, as witnessed by the most recent Equifax data breach of 2017, must be protected in order to maintain the privacy of individual information and the integrity of the credit granting mechanisms. Knowing where we’ve been and where we are headed as an economy built on giving and receiving credit will help us implement better methods in the future and ensure our three major credit agencies are doing their part to protect our data.

What are you thoughts about the credit reporting agencies and their roles? Should we replace or improve upon them? Let  me know in the comment section below!

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