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Role of Credit Bureaus in The United States – 6 Key Roles

role of credit bureaus

6 Key Roles of Credit Bureaus in The United States - Table of Contents

Decoding the Credit Bureaus: Essential Functions in the United States

Role of credit bureaus in the United States Statista says that the Credit Bureaus in the United States are expected to generate revenue of 142 billion U.S dollars in 2024. These numbers clearly say that credit bureaus are widely preferred by people these days. The role of credit bureaus is to collect information about the users from various sources and help the creditors to make decisions on loan approvals. Loan vendors will cross-check the creditworthiness of the loan seekers and decide if the person is capable of repaying the loan. Credit bureaus estimate the credit of the users and help loan vendors in this process. This article will explain to you how credit bureaus work in the United States. 

What Is A Credit Bureau?

Credit bureaus are the agencies that work on assessing the creditworthiness of the users. These credit bureaus gather information about the users and calculate their credit scores. Though these companies can not make decisions on loan approvals, the data they provide is the deciding factor for the loan lenders to approve loans. 

How Do They Work?

The credit bureaus of the United States work with the intention of supporting loan vendors by providing enough information about loan seekers. The credit bureaus collect the financial information of the users like payment history, credit utilization ratio, and other factors to ensure the credit worth by ensuring the previous credit repayments. 

With this information, they calculate the credit score and list the collected details in a brief report. The loan vendors pay for this report to analyze their customer’s credit performance. 

In short,

Credit bureaus collect user information from all third parties and:

  • Integrate them and evaluate the credit worth by calculating the credit score
  • They use the FICO scoring model to evaluate credit scores. 
  • Furnish the credit details in the credit report
  • Helps loan vendors with this credit report to make loan approval decisions

Top Three Credit Bureaus in the United States

Though there are multiple credit bureaus in the United States, the major credit bureaus are Equifax, Experian, and TransUnion. These bureaus are quite popular in the financial market for their Loan providers generally collect the credit reports of their customers from these bureaus and verify the information to approve loans. 

From the pawn shops run by the average citizen back in the day, Credit Bureaus have now evolved into National entities with an immense amount of data saved in their databases. Back in the day, shop owners were eager to find out whether they could safely loan out an amount or not. The major concern regarding the loan was the risk associated with it, mainly the default risk i.e. if the debtor of the shop would repay the loan or not. However, the process eventually led to the compilation of hundreds of credit records and this is when designated Credit Bureaus came into existence.

Today, there are 3 major Credit Bureaus that exist in the United States: Equifax, TransUnion, and Experian. Each of these Bureaus plays a number of important roles. The roles played by these 3 Credit Bureaus are:

  1. Work to create and enhance a culture that has data sharing at its core. The beneficiaries of the data-sharing culture should be the subscribers of the Credit Bureaus.
  2. Provide subscribers with precise data and solutions for issues. Also, solutions are provided to support objective application and processing models.
  3. Help the institution handing out the loan to reduce the likelihood of default risk. This is perhaps the most important role of Credit Bureaus as providing users with an accurate credit history minimizes the risks associated with a loan.
  4. Support the incorporation of procedures that fight fraud. These include putting in place certain checks and security measures that ensure the institution providing the loan has its money safe.
  5. Allow loans that do not require a “security”.
  6. Promote a culture of responsible lending so that the consumer is not overburdened by the loan itself. This, once again, is an important role and its importance has increased multifold since the Subprime Mortgage and Subprime Lending issues that occurred in 2007-2009.

Responsible for providing full credit history to financial institutions, oil companies, credit card issuers, and retailers, Credit Bureau cram in as much relevant data as possible into these individual histories. Examples of some of the information provided include records of credit applications, previous loan history, as well as payment behavior of the consumer. Furthermore, general data regarding the consumer is also kept, and this includes data regarding age, gender, records of employment, and social security number.

The relevance of Credit Bureaus has increased greatly since the Subprime Mortgage and Lending issue struck the United States. At that time, banks and other financial institutions handed out loans and mortgages to consumers that simply could not pay them back. This led to a huge number of defaults and the eventual closure or bailout of the financial institutions involved. 

Frequently Asked Questions

What are credit bureaus?

Credit bureaus are the credit reporting agencies that help loan vendors by calculating the creditworthiness of the loan applicants. Their standard credit reporting system will help loan vendors with the details regarding the previous loan repayments of the user that can influence the approval decisions. 

What are the major credit bureaus?

There are 3 major credit bureaus in the United States, Equifax, Experian, and Transunion. These three bureaus dominate the credit reporting industry as they are the most reliable and popular bureaus. 

What is the Fair Credit Reporting Act?

This FCRA (Fair Credit Reporting Act) by Federal Trade Commission is the legal law that ensures the loan providers, credit agencies or information providers have a legalized motto behind collecting the information. This act is to protect customer data from getting exposed unnecessarily. 

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Final Thoughts

There are numerous credit reporting agencies across the world. But, Equifax, Experian, and Transunion are the major credit bureaus on which most customers rely. If you are one of the loan providers, you can better collect the credit reports of the loan applicants from these bureaus and make decisions after comparing the loan criteria in the report. On the other hand, if you are an applicant, understand the criteria of these bureaus with which they evaluate and improve your performance accordingly.

TheCreditPros is one of the cheapest and standard credit repair service that can assist you to increase the credit score. For more information contact us(800) 411-3050

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