Credit bureaus act as information brokers for individual consumer credit histories. They sell their services to banks, mortgage lenders, credit card companies, retailers, and other businesses that grant credit.
There are three major national credit bureaus in the United States: Equifax, Experian, and TransUnion. All three gather and sell information about the creditworthiness of individuals, but they report it in different ways.
- Credit bureaus compile payment histories on every individual who obtains a loan or a credit card.
- They provide detailed analytics on their spending patterns as an added service.
- Marketing to pre-approved customers is targeted at lists compiled by the credit agencies.
- The bureaus now offer anti-fraud services directly to consumers.
On the surface, the financial arrangement between lenders and credit bureaus does not make much sense: Businesses that grant credit provide the information to the bureaus for free, then they pay to have credit information sent back to them.
The answer lies in the fact that the three credit bureaus collect, aggregate, synthesize, and analyze an enormous quantity of information sent to them by all of the businesses that an individual may obtain credit from over time.
How They Make Money
Credit bureaus sell four data products: credit services, decision analytics, marketing, and consumer assistance services. Sentiment around these companies is not always high, as many believe the credit reporting bureaus have too much sway over the long-term decisions that affect peoples' lives. But the companies make money in ways that are not so obvious.
This is the most familiar role of the credit bureaus. The credit bureau receives a request from a lender for an individual consumer's credit report, and the bureau sends it to the lender for a fee.
Federal law requires the credit bureaus to provide every consumer with one free report per year.
The bureaus also sell individuals copies of their own credit reports. Federal law now requires them to provide one copy per year free to each individual, but some lose their copies or want to track their reports more frequently.
Credit bureaus can provide lenders with an augmented credit report that includes not only a detailed transaction history but analytics about the ways an individual habitually handles debt. Lenders pay more for these reports.
Many lenders send out direct marketing materials that are targeted to customers who are pre-approved for credit. The credit bureau provides them with lists of likely candidates for these marketing campaigns.
Credit bureaus offer services directly to consumers, including credit monitoring, identity theft protection, and fraud prevention. These services have become increasingly popular as the risk of identity theft has grown.