12
Aug

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Credit is both a blessing and a curse. Without credit, our entire economy collapses. When we could only buy things “the old fashioned way” – after we’d saved up every last dime to pay for what we wanted – we led pretty threadbare lives. The concept that a steady income actually has immense buying potential was slow to root. Development of credit scoring over about a century made achieving lifestyle financial milestone purchases possible, as well as manageable. But, like so much else, credit can be a force for good when handled properly or a tool of ruin when it goes out of control.

Equifax, Experian and TransUnion are the nation’s three major credit reporting agencies, also called credit bureaus. They keep track of consumer and corporate spending and repayment history. The bureaus were established to protect creditors. Prior to their existence, a consumer could default on a financial obligation and simply shift over to obtain financing from an unsuspecting creditor who had no way to know that the consumer was a credit risk.

Equifax

Equifax began in a Tennessee grocery store in 1898. The proprietor compiled a list of customers he considered to be creditworthy, and distributed that list to other business owners (for a fee). Demand was immediate. The business grew. New branches opened and the company incorporated in 1913. By 1920, the company had 37 branch offices throughout North America.

Over the decades, Equifax and its predecessor, Retail Credit, Inc., experimented with different ways to grow the business. Priorities shifted, certain operations were spun off as separate companies, competitors were bought out. By the mid 1960s, consumer data on paper index cards was transferred to electronic storage. Investigation into consumer credit history was still done by inspectors, and data-gathering practices were often questionable in the contexts of professionalism and privacy. In 1974, Retail Credit, Inc. found itself in the crosshairs of the Federal Trade Commission following the 1971 passage of the Fair Credit Reporting Act. Among many changes, investigators could no longer misrepresent themselves and their motives when out collecting information. In the early 1990s, Equifax refined its privacy policies even further and stopped using credit data for direct marketing purposes, or to categorize consumers based on their buying habits. Over time, Equifax’s credit reporting (and access to its data) began to resemble what we see today.

Retail Credit became Equifax in 1979. The name derives from “equitable factual information.” By 1986, the company deployed data on 150 million consumers. And by 1987 Equifax operated in all 50 states. The company continues to narrow its core business focus and respond to consumer concerns. Today, Equifax serves companies and consumers in 19 nations and generates 150 billion credit score updates each month.

Experian

Experian’s beginnings go back nearly 200 years. In London in 1826 a group of merchants, the Manchester Guardian Society, shared information on customers who had failed to settle their debts. Years later (1897), on this side of the Atlantic, a Dallas lawyer compiled lists of consumers who were good and bad credit risks by persuading some local merchants to pool their information. In the early 1960s, two aerospace engineers who believed our society would transition away from the use of cash launched the consumer credit information unit in a company called TRW. (TRW had its roots in engineering at the turn of the 20th Century, and became a leader in defense electronics. In the early 1960s, it launched its consumer credit division, and in the 1970s, a small business database.) By the mid 1980s, TRW held the credit histories of 90 million American consumers. These companies laid the foundation for Experian, which officially came into being in 1996.

Like the other credit bureaus, Experian had problems with credit data gathering practices. In an infamous 1991 bungle, an investigator employed by Experian’s predecessor, TRW, erroneously reported that 1,400 residents of a Vermont town had not paid their property taxes. The error triggered a credit disaster for many of those consumers. Investigation revealed similar cases of misreporting across New England. At the same time, reports of horrendous customer service surfaced and at least twelve states filed lawsuits against the company. Experian quickly implemented significant changes to overcome its flaws.

Experian’s core business model changed over time. In 1986, its predecessor, TRW, sold consumers their credit histories for a $30 annual fee. The Fair Credit Reporting Act eventually gave all consumers the right to view their credit files cost at no cost. In 1996, Experian broke away from TRW and joined forces with the largest credit reporting company in the United Kingdom, CCN Group Ltd.

Experian now maintains a vast database on both consumer and business credit, and does business in about 50 different countries.

TransUnion

Like Experian, TransUnion got its start in a company whose main business was not gathering credit data. In 1969 it acquired a credit data collector and by 1988, TransUnion maintained consumer credit data in all 50 states. In 2002 TransUnion acquired a company that facilitates self-credit monitoring by consumers. In 2005, the company was spun off from its parent, Marmon Group, whose focus is on manufacturing.

Modern credit reporting

Mass credit card usage entered mainstream American society in the 1970s. Losses to creditors were common. Not only did profits take a beating, the losses also diminished funds available to lend to responsible borrowers. At the same time IBM’s advances in computing made data collection and sharing faster and easier. Market demand married technology and the modern credit reporting industry was born. The advent of the Internet further facilitated data collection, requesting reports and error correction. The agencies (with help from new laws) continue to refine their processes.

Each of the three credit bureaus has its own focus within the credit industry. Experian’s specialty is to provide businesses with viable leads (think pre-approved credit card offers). Equifax has a strong grasp on corporate credit analysis. TransUnion tracks foreign creditors heavily and analyzes the creditworthiness of Americans living abroad. All three analyze consumer credit in the U.S., and each has its own proprietary method for doing so.

The credit bureaus are not out to punish anyone. On the contrary, they enable consumers to take advantage of impressive opportunities. Imagine asking a family member or friend for a loan of $300,000 to buy a home. Even if you have access to people with those kinds of resources, they might not be interested in putting that many eggs in your basket. Your credit file, on the other hand, can inspire a total stranger to take a chance on you if your file paints a picture of someone who faithfully honors his debts. Love it or hate it, our society thrives on credit.

The bottom line

Although credit bureaus were designed to help creditors, they also help consumers. Like a watchful parent, they help protect us from ourselves. Notwithstanding the fact that some people have low scores or no score because they don’t use credit products and not because they mismanage their credit, past experience is the best indication of future behavior, and so the most accurate prediction of a person’s ability to repay a debt is to know how they handled debt in the past. Remember, it doesn’t take money to get a great credit score, only responsible financial behavior.


Posted in Credit Score