Information on Credit Agencies

From an idea conceived in the mid-19th century by a Calvinist East Coast merchant with an aversion to credit rooted in biblical principles, credit agencies have grown to be so integral a part of life in the United States that where you're able to live -- or even work -- may hinge on the information a credit agency has gathered about you.

Origin

The credit agency concept is attributed to Lewis Tappan, a devoutly religious Philadelphia and Boston businessman who began extending credit to his customers in the mid-1830s to keep his then-struggling mercantile business afloat. To help him assess the appropriateness of his decisions, Tappan gathered and evaluated information on his customers' character and creditworthiness. Other merchants eventually sought his advice and, in 1841, Tappan founded the Mercantile Agency, which, through a series of transfers, mergers and name changes, is still in business today.

Function

Credit agencies are NOT decision-makers.

Credit reporting agencies do not make decisions to extend or deny credit. Instead, they collect a variety of consumer data, including your employment and bill-paying histories, the types of credit you use and the amounts you have previously borrowed. The credit agency then applies a number of formulas and analytics to render a score that prospective creditors can access, for a fee, to evaluate the potential risk of extending new or additional credit to you.

Evolution

Once used primarily by merchants, credit reporting agencies have expanded into consumer intelligence businesses that now also compile information for a wide variety of users, including direct marketers, landlords, insurance companies, employers and others, to help them make decisions ranging from the amount of your auto insurance premium to whether or not to extend to you an employment offer or accept you as a tenant. According to Reference for Business, there are more than 1,000 credit agencies across the country. Most, however, are either directly owned or contracted by one of the three dominant U.S. consumer credit reporting agencies.

Regulation

Consumer credit reporting agencies are regulated by the U.S. Federal Trade Commission, the government bureau that enforces the provisions and subsequent amendments of the Fair Credit Reporting Act of 1971, which, according to the FTC, promote "the accuracy, fairness and privacy of information in the files of consumer reporting agencies." Passage of the Fair and Accurate Credit Transaction Act of 2003 places new responsibilities on credit agencies --- including mandating them to better help consumers fight the growing incidence of identity theft --- and also subjects them to regulation by financial bureaus such as the Federal Reserve.

The Future

As credit agency roles expand, new legislation that gives you increased access to the information in your credit file is prompting the development of new products that make it easier for you, as a credit consumer, to interpret your credit score. Additionally, increases in the number of global credit consumers will continue to open new markets for credit reporting bureaus, as well as produce innovations in their analytical models.