What is a Credit Bureau?
A credit bureau is an agency that collects and researches individual credit information and sells it for a fee to creditors so they can make a decision on granting loans.
How Do Credit Bureaus Work?
Credit bureaus partner with all types of lending institutions and credit issuers to help them make loan decisions. The three main credit bureaus in the United States are Equifax, Experian, and TransUnion, though there are many smaller companies that provide similar services.
The primary purpose of credit bureaus is to ensure that creditors have the information they need to make lending decisions. Typical clients for a credit bureau include banks, mortgage lenders, credit card issuers and other personal financial lending companies. Credit bureaus are not responsible for deciding whether or not an individual should have credit extended to them; they merely collect and synthesize information about an individual's credit score and give that information to lending institutions. Consumers can also be customers of credit bureaus, and they receive the same service – information about their own credit history.
Credit bureaus acquire their information from data providers, which can be creditors, debtors, debt collection agencies, vendors or offices with public records (court records, for example, are publicly available). Once collected and synthesized this information is disseminated from the three largest credit bureaus, Equifax, Experian, and TransUnion. Most credit bureaus focus on credit accounts however some also access more comprehensive information including payment history on cell phone bills, utility bills, rent and more. Credit bureaus maintain all of this information in a comprehensive credit report.
Credit bureaus use a range of methodologies to calculate a credit score for individuals based on their credit history. FICO scores are the most common credit scores in the U.S. With over 25 different versions of FICO scores, credit bureaus have a range of methodologies for calculating a borrower’s credit score. Credit bureaus usually provide the range of credit scoring methods they calculate for a credit issuer allowing them to choose the type of credit score that best fits their inquiry.
Credit scores and credit reports from credit bureaus provide credit issuers with information that helps them determine credit approval and appropriate interest rates for borrowers. An individual with a higher credit score will likely have a lower interest rate on their loan.
Credit Bureau Regulation
In the United States, credit bureaus are also called consumer reporting agencies (CRAs). While credit bureaus don't actually make lending decisions, they are very powerful institutions in finance and the information contained in their individual reports can have a substantial impact on an individual's financial future. The Fair Credit Reporting Act, passed in 1970, regulates credit bureaus and their use and interpretation of consumer data and is primarily designed to protect consumers from deliberate or negligent information in their credit score reports.