Your financial life is dictated by your credit score, which in turn means that you are at the mercy of the credit bureaus that create these scores. But who are these bureaus, why do they do what they do and how do they compare to one another?
Why Do Credit Bureaus Exist: The History
Before credit bureaus, credit worked a little differently. Each bank or agency had their own process for determining whether a customer was a good borrower or not, taking into account everything from their employment to their standing within the community.
And this worked within those communities, because it wasn’t easy for someone to hide from their debt. If someone was heavily in debt with a bank, you can guarantee that all other banks would know about it. But this method wasn’t as effective in large cities, and it wasn’t at all effective at determining the credit worthiness of newcomers.
In other words, it was an old-school method for a bygone time, and something new was needed.
Enter the early credit bureaus. These were founded as collectives of financial organizations, including retail groups, banks and trade guilds. They began to create a list of customers who could be trusted, customers who paid their debts on time. If those customers defaulted, they would be stricken from the list.
These agencies began handing out these lists to lenders and over time this became a profitable enterprise in itself. They charged lenders to see these lists and the more lenders that paid them for this service, the more time they could spend on improving the service. They began including the details of all potential customers, not just those previously in debt, and eventually they morphed into the credit bureaus that we know today.
There were many more than three back then, but mergers, and expansions changed that. In fact, there are still more than three today, but these are the ones that everyone uses and the ones that lead the way.
How do Credit Bureaus Work?
The bureaus work by taking information submitted to them by creditors and then using it to build a detailed report on you. They use algorithms to build a score, as we discussed in What Affects Your Credit Score and How to Repair Credit, and these are then sold to everyone from potential lenders to potential employers, landlords and insurers.
There is no set algorithm or score, no fixed way to operate. They all do things their own way, have their own fees and their own rules, and while they are very similar in how they operate, at least from the perspective of a borrower, there are some key differences.
We have discussed these below.
Equifax vs TransUnion vs Experian
The main difference between the three major credit bureaus is the information that they have on you. A lender is not required by law to report your info to a credit bureau. This is something that they do voluntarily and if they choose they may only report you to one or to two of them.
Most banks and lenders will report to all credit bureaus because it fosters a healthy relationship. It only makes sense, as they benefit more when other banks do it so they set a precedent by doing it themselves. However, some smaller lenders may not do it, some mistakes might be made, and this could result in your credit report looking very different across the three different agencies.
This is why many financial experts recommend that you get regular reports from all three, making sure you stagger these reports several times a year as opposed to getting them all at once. You can view them all for free and while you may choose to opt for the premium services on one of them, you should also make sure that you at least see your report on the other.
There are also differences regarding how they gather information and report it. TransUnions like to be very thorough when gathering information about your employment history, which is why they may be preferred by future employers running checks. Other differences between the three main credit bureaus include:
- They all differ in how they choose to list your credit history, including good and bad accounts, previous debt, and more.
- Experian tends to be more informative with regards to how long certain negative marks and accounts will remain.
- TransUnion uses a color coded system to separate payment rates into blocks, such as green for “current” and red for “60” or “120” days late.
- The premium (paid) subscription services and benefits they offer all differ.
Credit Scores: FICO vs VantageScore
The data that credit bureaus use to build a credit score differs, simply because while one bureau might have a full history of your previous borrowing, another may have missed something. The score itself, however, is usually the same as they tend to use something own as a FICO Score.
This is a formula that is licensed by the Fair Isaac Corporation and helps to provide some uniformity across the major credit bureaus. It ranges from 300 to 850 and we have discussed it extensively on this site before.
However, there is also a formula known as VantageScore. This used to use a scale from 501 to 990, but now it uses the same 300 to 850 model. The difference is in the way that the information is gathered because while a FICO score is built on the information provided to credit bureaus by lenders, the VantageScore is calculated based on the information the credit bureau have gathered themselves.
As things stand, the FICO score is by far the most popular with lenders and the one you need to focus on as a borrower. But this might change.
Other Credit Bureaus
As mentioned at the outset of this article, there are many credit reporting agencies out there other than the big three. These exist in niche markets, but they operate in a similar way, gathering information that is then sold to a person who wants to learn about your credit history.
The Consumer Financial Protection Bureau keeps a full list of these credit reporting agencies, which you can find here.
They exist in niches such as:
- Tenant screening: Includes more information related specifically to previous addresses.
- Insurance: To determine if you are a good match for everything from life insurance to home insurance.
- Communications and Utilities: Regarding electricity bills, phone bills, etc.,
- Casinos: Used by land-based casinos giving out lines of credit and rebates to customers. Other casinos and gaming houses report to these agencies.
- Debt collectors: Gathers information that is compiled by, and is useful to, debt collection agencies.