AARP Hearing Center
Almost two years have passed since hackers exposed the personal information of 148 million Americans held by the credit bureau Equifax. But the fallout continues. New laws passed in September make it free for all Americans to freeze their credit reports—a strategy considered among the best ways to stop criminals from using stolen personal info. (In the past, credit bureaus often charged for that service.) Yet much confusion remains about credit bureaus. What are they? What do they do? Can they be trusted to safeguard our private information? Here’s what you need to know about the industry today.
1. They exist for a good reason.
Any time you want to borrow money—whether it’s to buy a house or car, finance an education, or use a credit card—the company lending you the money needs to know you are trustworthy before it says yes. Similarly, landlords, insurers and sometimes even employers want to know you are financially trustworthy. Credit bureaus emerged out of this need. Most banks, credit-card issuers and other companies lack the resources to collect and review the financial background of everyone who applies for credit. So they agree to share financial information on their customers with credit bureaus, whose primary business is to consolidate and organize financial background on more than 200 million adult Americans. In return, by paying credit bureaus a small fee they get access to this information when a customer applies for credit. It is a relationship that has worked well since the late 19th century. (Equifax started supplying merchants with credit information as the Retail Credit Co. in 1899.)
2. The industry has consolidated.
There are dozens of smaller and specialized credit-reporting bureaus, but the three big ones are Equifax, Experian and TransUnion. They are the oldest, largest and most influential. Nearly every American is in their databases, and together they have billions in annual revenue.
3. It comes down to a number.
Credit bureaus take all the info they have collected about you and apply their proprietary algorithms to assign you a credit score. Depending on the bureau and its methods, scores can range from 250 to 900. The higher your score, the more likely you’ll be awarded credit, and the better deals you can negotiate when you buy a car or refinance a mortgage.
4. You have many scores.
It’s a myth that you have just one credit score. Because there are so many bureaus and so many ways of slicing the data, you actually have dozens. The credit-scoring company FICO, for instance, has specific algorithms for auto lenders, bank cards, mortgage lenders and even health care providers, each of which can be used by these specialized businesses to better gauge the risk of having you as a customer. But whatever the method of calculation, federal law requires it to be “empirically derived and statistically and demonstrably sound,” says credit expert John Ulzheimer, formerly of FICO and Equifax. In other words, there must be science behind it.
