The Purpose of Credit Companies

Without credit reporting companies, you might not have been able to get a mortgage or credit card. The credit reporting companies are more of a repository for credit histories -- the actual scoring part belongs to another company.

Identification

Credit reporting started in the late 1800s because lenders needed a way to judge the willingness of a person to repay a debt. When a lender does not have hard data to judge the creditworthiness of a person, he must rely on instinct and judgment of character. Both of these can lead to bias and inaccurate credit ratings. While a creditor could collect data on borrower's himself, it is much cheaper for a third party to do this for lenders.

Credit Scoring

While credit reporting companies may offer solid data on a person's financial history, the national bureaus in the U.S. do not rate a customer's creditworthiness. Another company, the Fair Isaac Corporation, developed a formula in the late 1980s that predicts the chance of a person missing a payment. The FICO formula's factors are based on data reported by the national credit reporting bureaus. Without a report from the national credit bureaus, a formula to rate a person's creditworthiness would be useless.

Secondary Purpose

The credit reporting companies are becoming more than just a database for lenders because other service providers use these reports too. Employers, for instance, use the employment history on a credit report to check the accuracy of the employment time-line on an applicant's resume and rental car companies check reports when a person uses cash or a debit card for a rental. Landlords check credit histories for bankruptcies and evictions.

Tip

The national credit bureaus are privately held companies so they are out to make money. However, the federal government requires the bureaus to provide each consumer with a free credit report every year through AnnualCreditReport.com. Additional reports and reports access through any site other than AnnualCreditReport can come with a fee or require giving the company your credit card number.