Although credit scoring has been around since the 1950s, it wasn’t until the 1980s that it hit mainstream in the United States. Before that, lenders would use human judgment and personal opinion when evaluating a credit report to make a decision on an applicant’s ability to repay debt. Not only was this a very slow process, it was unreliable because of human error. Fewer loans were made and it was much more difficult to qualify for financing than it is today.
The History of the Credit Report
Where did those reports come from that lenders based their judgments on? It all started in 1898 with two brothers who owned a grocery store in Chattanooga, Tennessee. Cator and Guy Woolford assembled credit records of local residents and created what they called, The Merchant Guide, which they sold to retailers for $25 per year. Retailers used the information as an indicator of consumer creditworthiness. Sounds to me like the making of the first credit report!
The Merchant Guide was so successful that the Woolfords set out to make credit reporting their career. Eventually their company, originally called Retail Credit, became Equifax, one of the nation’s three major credit reporting agencies.
As with any successful business idea, you can imagine that hundreds of entrepreneurs followed in the footsteps of Retail Credit hoping to profit on the great idea of selling credit reports to lenders and banking institutions. However, only three credit reporting agencies have truly prevailed: The Big Three, AKA “The Credit Bureaus.”
- Experian, and
The Credit Bureaus — Who Exactly Are The Big Three?
Mistakenly referred to as Government agencies, one of the biggest consumer misconceptions in credit is who the three credit bureaus really are.
The word “bureau” in the Encyclopedia refers to “public office, government agency, news bureau.” No wonder there’s so much confusion.
The credit bureaus are NOT government agencies. They do not work for banks or creditors, and they are not paid to make your life miserable—it just feels that way. They are three companies that saw a vision of huge profits to be made by collecting data about YOU from your creditors and reselling that data to prospective lenders, employers, insurance companies, utility companies, and, most recently, to YOU, the consumer.
Today, all credit reports have one thing in common: The Big Three. All credit report vendors get their data from these three credit reporting agencies. So it’s important that you familiarize yourself with who they are, and where they came from.
What Is Equifax
As mentioned above, Equifax was originally founded as the Retail Credit Company in 1898 by Cator and Guy Woolford.
After their initial success selling credit information to local retailers, the company continued to expand with 300 branch offices and nearly 1,400 satellite offices. In the mid-1960s Retail Credit took the first steps toward automation. They took 3” x 5” index cards bearing information on thousands of consumers and converted all this into an electronic database, which proved to be the company’s greatest asset.
In 1979, they changed their name to Equifax, Inc. and strengthened their reporting operations by buying up smaller companies. Today the company, headquartered in Atlanta, Georgia, employs approximately 6,900 people in 14 countries throughout North America, Latin America and Europe. They currently maintain data on more than 300 million consumers and 100 million businesses worldwide.
What Is Experian?
You may recognize the name TRW. In order to understand the relationship of TRW and Experian, We have to go back a little in history.
Thompson Ramo Wooldridge Inc. (TRW), was founded in 1901 as the Cleveland Cap Screw Co. It began by making cap screws, bolts, and studs, but soon its main product was welded valves for cars made by automotive pioneer Alexander Winton.
In the mid-1960s, TRW launched its Information Services division and started compiling a consumer database. Like Equifax, the company grew by purchasing smaller businesses and continued to expand. By the mid-1980s, the company had a firm position as the largest credit reporting agency in the United States with credit histories on file of approximately 90 million Americans.
However, in the early 1990s, an article in The Wall Street Journal accused TRW of sloppy procedures and inadequate response to consumer complaints. These accusations resulted in a multitude of lawsuits, most of which were remedied; however at that point TRW decided to sell off the Information Services Division, and the first buyer in line was a company called Experian, founded in 1980 by a man named John Pace in Nottingham, England.
Prior to 1996, when Experian acquired its US credit reporting business from TRW, Experian’s business was in marketing solutions, decision analytics and interactive services, collecting information on people, businesses, motor vehicles, insurance and lifestyle data.
The company, currently employing more than 4,500 people in North America, maintains credit information on approximately 215 million consumers and more than 15 million businesses in the United States. The firm provides address information for more than 20 billion promotional mail pieces sent out to more than 100 million households annually.
What Is TransUnion?
TransUnion was formed in 1968 to be the parent holding company for the Union Tank Car Company, a railcar leasing operation.
They entered into the credit reporting business in 1969, when they acquired the Credit Bureau of Cook County (CBCC), which manually maintained 3.6 million card files in 400 seven-drawer cabinets.
In the early 1970s, TransUnion, creating the tape-to-disc transfer which drastically cut the time and cost to update consumer files, became the first company in the credit reporting industry to revolutionize the transfer of consumer data between the creditors and the credit bureaus.
Throughout the 1970s and 1980s, they continued to expand their facilities and capabilities through investments in technology and strategic growth initiatives and acquisitions. In 1988 they achieved full coverage in the United States, maintaining and updating information on virtually every market-active consumer in the country.
Today, TransUnion reaches businesses and consumers in 25 countries on 5 continents , and they maintain credit histories on an estimated 500 million consumers around the globe.
The Credit Distribution Tree
Understanding the different aspects of the credit reporting process can be difficult to get your head around. The credit distribution tree from Linda Ferrari’s Book, The Big Score should help you understand how there can be so many versions of your three credit reports and scores.
The process starts with a transfer of data from the creditors to the credit bureaus regarding your payment history. This transfer of information is implemented through a tape-to-disc transfer and occurs as follows:
- On open installment and revolving accounts, every 30, 60 or 90 days, depending on the individual creditor’s reporting procedures.
- On negative payment history as it relates to collections, charge-offs, and public records, usually within 60-90 days of occurrence.
The Credit Bureaus
- They store your data individually, and do not share that data.
- They update your file whenever the creditor reports. Many creditors do not report to all three credit bureaus, so the information being stored will vary.
- They do not store your credit score. The information in your credit report changes often. Your scores are calculated each time your credit report is pulled.
- They sell your data to Businesses and Consumers in the following ways:
The three credit bureaus are the only companies who store your data. In all instances below, the data is fed real time at the time your credit report is pulled.
- All three credit bureaus sell data to 100s of Tri-Merge Vendors. Tri-Merge Vendors are companies who sell credit reports and credit scores to Businesses (i.e. mortgage companies, auto lenders, insurance companies, banks.) Tri-Merge Vendors would include Landsafe, Kroll Data, and Info 1 as examples.
- All three credit bureaus also sell data to 100s of Online Vendors. Online Vendors are companies who sell credit reports and credit scores to consumers directly.
- All three credit bureaus also sell credit reports and credit scores to businesses direct who use those reports to make lending decisions (i.e. mortgage lenders, auto lenders and banks)
- Finally, all three credit bureaus sell credit reports and/or scores to consumers directly.
Third Party Vendors
MyFico.com, Tri-Merge Vendors and Online Vendors (i.e. freecreditreport.com, truecredit.com) are considered Third-Party Vendors because once they receive your credit information from the three credit bureaus they then sell your credit reports and scores as follows:
- Tri-Merge Vendors sell credit reports and scores to hundreds of thousands of businesses directly that use those credit reports and scores to making lending and non-lending financial decisions about millions of consumers.
- Online Vendors sell credit reports and scores to millions of consumers directly.
The credit reporting system has a generations-long history. From very humble, pre-technology beginnings early developers sought to help quantify the risk of loaning an individual money.
Thus you need to understand the background that put the systems into place. It is important for you to understand how it all comes together, and how all of these big businesses compile the decision-making information that has master power over your financial future.
Understanding how the credit scoring industry compiles your information will give you a better understanding of how information gets processed, as well as how mistakes happen. The ultimate goal is that this important information will help you be a wiser, better educated consumer who will know where to go for information and help when there’s a problem.