Why are there 3 Credit Reporting Agencies? – Episode #98
Why Do We Need Three Credit Reporting Agencies?
If most credit cards are national cards, and we live in the digital age where information is zapped back and forth in nano seconds, then why do we still have 3 reporting agencies? Why did all 3 agencies come to be in the first place?
The history of the origins of credit reporting companies makes sense. It used to be back in the pre-internet, pre-electronic age, that a local credit bureau had sprouted to track the local credit behavior of consumers. If you wanted credit for a car, a local credit bureau could report information collected on your local bank mortgage and that was used in the decision process. As the electronic age blossomed, these small bureaus grew and acquired other bureaus to become large regional credit bureaus. Trans Union dominated the midwest Equifax dominated the South and Experian had strong pockets on the west coast. Today, most large financial service companies report to all three credit agencies, which is why in most cases, a consumer’s FICO scores for each data set will not vary much. Mine are usually within 20 points of each other. Still, some consumers still report having 100 point differences between their 3 credit reports.
Why do we need 3 today? Why don’t they just merge? One reason is competition. The US government recognizes that each of the 3 major credit bureaus are very powerful as they have access to so much consumer financial data. These companies not only make money off of consumers buying credit reports, but they also sell the data to other marketing companies to market products to consumers. This is why you can opt out of marketing from the 3 credit bureaus. A good idea if you want to reduce your junk mail. If there was only 1 company, many agree that consumers and other businesses would be harmed through price gouging.
Why don’t lenders just pick one and use that one? Well, in the case of auto loans, they do. They often just have a relationship with one credit agency and use that report/score in their decisioning. But, home loans are such a big ticket item, lenders decided to get all 3 scores to make sure they had as much data as possible to make a good decision. Oddly, their final decisioning filter is not that mathmatical — they will take the mid score and use that in decisioning. If you are married, they often take the lower of the two persons mid scores and use that in their decisioning analysis.
What does this mean for you the consumer? It means that, like it or not, you need to monitor all 3 credit reports and FICO scores to make sure your credit is clean. Wait, what if you are buying a car and they only use one? You still need all 3 as likely you won’t know which one they use and each car manufacture uses a different agency so you need to know all 3 to have negotiating leverage.
