The Role of Credit Agencies

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    Basic Purpose and Business Model

    • Every for-profit organization exists because it makes money. The credit reporting agencies make their money by selling individual credit histories to potential lenders. They gather this information from public records and reports made by lenders, tempered by responses from the individuals in the case of erroneous or out of date information.


    • In the early days of consumer credit, lenders would take out public notices or advertisements against those who reneged on a debt. As debt became more common, specific laws came into effect that allowed the lender to seize the property of, or even jail, a defaulting borrower. As those laws fell out of practice in the late 19th century, social pressure came back into vogue. Lenders would commonly hire a "bawlerouter," a woman who would publicly berate debtors as deadbeats. During the 20th century, this general social embarrassment evolved into specific reporting of credit information to the people most directly affected by it: potential lenders.

    What's in it for Lenders

    • Money is lent out at the risk of it not being paid back. If creditors made all loans with no knowledge of how likely they were to get it back, they would either have to severely restrict how many loans they made, or charge exorbitant fees and interest on all loans. By getting detailed information as to how great a risk a potential borrower is, they can offer large loans at good rates to people with solid credit. They also know how much extra to charge people with poor credit, opening credit options for that market as well.

    What's in it for Borrowers

    • If you have good credit, the credit reporting bureaus are your friends. The information they provide about you qualifies you for larger loans at lower interest. If you have poor credit, they may seem like the enemy. However, you can use your credit report as a map for improving your credit for the future. Both high and low risk borrowers can also use their credit reports to check against identity theft and fraud. That report is sometimes the first place illegal use of your information will show up.

    Other Uses

    • Landlords often use a credit report when screening potential tenants, since how well you keep other financial commitments is a good predictor of how well you'll pay your rent. During the early 21st century, insurance companies and employers have also started to access credit records for what they say about a potential client or employee. As of 2010, whether or not they are allowed to is contested from state to state.

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