May 4th, 2015 by Jason M. Kaplan, Esq.
The Role of the Credit Bureaus in the United States
From the pawn shops run by the average citizen back in the day, Credit Bureaus have now evolved to 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:
- Work to create and enhance a culture that has data sharing in its core. The beneficiaries of the data sharing culture should be the subscribers of the Credit Bureaus.
- Provide subscribers with precise data and solutions for issues. Also, solutions are provided to support objective application processing models.
- 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.
- 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.
- Allow loans that do not require a “security”.
- 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 a full credit history to financial institutions, oil companies, credit card issuers, and retailers, Credit Bureaus 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 back. This led to a huge number of defaults and the eventual closure or bailout of the financial institutions involved. For more information on Credit Bureaus and their history and roles, watch Jason Kaplan, Esp. explain it all:
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