THE BIG 3 CREDIT BUREAUS

What are credit bureaus?

Credit bureaus are companies that collect information on the credit ratings of individuals or consumers of financial products and make that information available to banks and other financial institutions. This is how it works; according to Investopedia: “banks, financial companies, retailers and landlords etc send consumer credit information to the credit bureaus for free and then the credit bureaus in turn sell consumer information right back to them.” To what end one may ask? It is to ensure financial transparency and accountability, thereby increasing rapidly, the ease of doing business which enhances economic growth and development.

Having said so, our focus here is the big 3 credit bureaus probably in the world today, the scope of their operations or the countries in which they offer their services and how they function. The 3 biggest credit bureaus in the world today have their Head quarters located in the US and have subsidiary offices in other countries of the world. According to Investopedia, the big 3 credit bureaus are Equifax, Experian and TransUnion. They are the major players in terms of collection, analysis and disbursement of information about consumers in the credit markets.


Equifax; Equifax is located in Atlanta, has 7000 employees and operates in the US and 18 other countries which include Brazil, Argentina, Russia, UK and India. It is dominant in the southern and eastern parts of the US and it claims to be the market leader in most of the countries it is located.

Experian; this company on the other hand is located in California, Costa Mesa precisely, it initially handled reports for the western United states but currently sees itself as the leading global information services company. It employs approximately 16,000 people in 39 countries and has its corporate headquarters in Dublin and its operational headquarters in Nottingham (UK) and Sao Palo (Brazil).

TransUnion; located in Chicago, TransUnion regards itself a global leader in credit information and information management services. It operates in 33 countries and employs 3,700 people approximately (Investopedia).

HOW THEY OPERATE

All three companies undergo similar processes but slightly different operation methods. They collect the same type of information about consumers which includes demographic data, such as name, address, Social Security number and date of birth. It also includes credit history, debts, payment history, and credit-application activity.

They use this information to develop consumer credit reports and calculate credit scores. The higher the score, the lower the credit risk a consumer is regarded and the higher his creditworthiness. These scores have traditionally been based on the FICO Score associated with the data-analytic company originally known as Fair, Isaac, and Company which was modified to FICO in 2009. While you can still get a FICO score from any of the Big Three, their calculation methods differ. Experian uses its own Experian/FICO Risk Model. Equifax on the other hand has a proprietary scoring system as well (on a scale from 280 to 850), usually just referred to as the Equifax Credit Score. TransUnion's default credit score is called Vantage Score which was created cooperatively with the other two bureaus as an alternative to the FICO system; its predictive scoring system is also referred to as TransRisk.

The implication of the above is that an individual’s credit score and FICO score may vary from bureau to bureau. These differences are based on the different proprietary calculation methods, gaps in information reporting and gathering, and the fact that bureaus do not always have the same information about the individual’s debt history at the same time. On any given day, one firm may have different information about the individual on file than the others.

What then is the purpose of the credit scores and credit reporting system?

The aims and objectives of credit reporting include;
Encouraging and improving access to loans which starts with a good credit history
Enhancing the creation of new loans which would lead to better access to finance
Aiding financial institutions to assess and better manage risks associated with lending.

To promote responsible lending and borrowing: borrowers can avoid over indebtedness and lenders can avoid bad debts and defaults using the credit reporting system to equip financial institutions with the required infrastructure and tools for processing and managing loans to MSMEs and individuals.

Another outstanding feat of the credit bureaus is that they facilitate the ease of doing business by significantly improving access to credit especially for the disadvantaged sectors of the economy particularly for consumers and SMEs. Furthermore, the World Bank findings reveal that, with the introduction of credit bureau:

Small businesses reporting high financing constraints reduced from 49% to 27%
The probability of obtaining a bank loan for small firms increased from 28% t0 40%
In Ecuador, the number of micro entrepreneurs that accessed loans after 5 years increased from 60,000 to 719,000 (1,098%)
In Ukraine, significant decline in interest rates from 38% to about 15% within 5 years.

All these achievements were made possible because credit bureaus are permitted by law, to carryout research on individuals and consumers. However, we must state on a final note that one can't control which agency a company researching you will consult. But, companies and methodologies aside, high credit scores are always better. While comparing scores may not reveal identical numbers, it is still a useful exercise. If you have a good score at one company, you should have good scores at all of them, even if the actual numbers are slightly different.