Whenever larger purchases are involved, credit is always a big consideration. Companies that communicate with reporting agencies through credit data services can quickly determine loan eligibility from a variety of scores. Since credit bureaus play such an important role in finance, it’s important to understand how they work. Here is a quick breakdown of these services and how they actually profit from revealing your financial data!
The “Big Three”
When it comes to consumer credit reporting, there are three names that borrowers and lenders need to keep in mind. The biggest organizations that provide reporting are Equifax, Experian, and TransUnion, and their role is to sell consumer financial data to lenders. The trio do so in different ways, but all provide a comprehensive credit score that businesses and individuals can easily understand. Companies can then use credit data services to implement that information in a variety of ways.
The main output of credit bureaus are these scores, and are the primary way these companies make money. Their services aggregate a wealth of financial information collected from a variety of sources. It is then analyzed and distilled down to the credit score that lenders use to assess the risk involved in providing loans. These reports are sold to a variety of organizations including potential employers, loan officers, and credit companies, but only with your permission.
While the Big Three profit off of selling data, they often pay very little to get it. Most financial and commercial institutions freely give information to those companies only to pay to get it back again later! Banks, credit unions, debt collectors, credit card companies, and mortgage lenders all voluntarily share their information. Typically, these institutions will communicate several facts with at least one of the three major credit bureaus, including:
- When a loan application was filed
- When an account was opened
- Who has access to accounts and balances
- Current balance and limit
- Payment status and history
- Collections information
Credit bureaus also rely on publicly accessible data to bolster their financial analysis. By looking into liens, court judgements, and bankruptcy filings, lenders can get a well rounded view of an individual to better understand how likely they are to pay back a loan. Providing this analysis via credit data services offer companies a more complete picture of lending opportunities.
The Collection Connection
Not all data is important to financial institutions, and a lot of what is communicated is sensitive and private information. That’s why credit bureaus analyze the data and present it in a simple numerical form. They collect and aggregate many types of data, such as:
- Personal information such as social security numbers and prior addresses
- Public records including bankruptcies, foreclosures, and wage garnishment
- Tradelines, or records of current and past lines of credit
- Inquiry records about who requests your score and why
Instead of a lengthy breakdown of all these statistics, bureaus analyze it and supply credit data services with a simple number and some additional facts. Because all of your sensitive information is hidden behind your credit score, all of the private data remains safe.
Because credit bureaus collect a lot of data, its common to believe that they include everything in their lending analysis. However, there are a numer of things that these organizations either do not communicate or are barred from releasing to other companies. The kinds of statistics credit bureaus do not collect include:
- Political Views
- Bonced Checks
If a lender is looking for this information when filling out loan applications, an individual may need to provide much of it on their own. Even if credit bureaus have access to any of that data, they aren’t allowed to communicate it on your behalf.
Scoring a Profit
It may seem questionable to have companies selling your financial information for a profit. In reality, it is a system that makes sense for both the borrower and the lender. By providing third-party analysis of credit information, lenders are forced to use only financial data for loan qualification assessments. This protects people and businesses from unconscionable lending practices based on race, ethnicity, or other unimportant information.
Credit bureaus provide an important service that acts as a go-between for both parties. It gives lenders a quick breakdown of a consumer’s financial viability and allows individuals to get a quick look at ways they can improve their credit and make borrowing easier in the future. As a trusted source of information, these companies can present their findings directly or through credit data services to ensure the best financial decisions are made regarding you and the institution you’re borrowing from!