A credit bureau is an organization that collects credit data related to individuals, maintains and updates the information on a regular basis and usually sells the information for a fee to third parties. These organizations collect the loan or borrowing history, spending habits as well as repayment history for individuals. This data, when analyzed, can serve as a powerful predictor of the individual’s future borrowing, repayment, and spending habits. Apart from predicting the future behavior, the credit history can also be used as a tool for fraud detection. The data related to the credit history of an individual is analyzed and based upon the conclusions, the information is typically quantified by a score known as the credit score.
In most cases, the lenders, typically banks and other financial institutions collaborate with these credit bureaus to obtain the credit score before approving a loan. However, credit score influences many other aspects of a credit. Not only does the credit score determine whether a credit is to be issued to an individual but it also determines several other terms including the interest rate, term of repayment and many other details. For example, consumers with poor credit scores usually pay a higher rate of interest compared to those individuals who have a “healthy” credit score.
Collecting the correct information about an individual’s spending habits, credit, and loan repayment history is very critical for the individual, the banks and the credit bureaus. The credit bureaus typically partner with other organizations that collect this data and furnish the information to the credit bureau. These partners are also known as furnishers. The furnishers are mostly organizations like banks, creditors, debt collection agencies, etc. When an individual engages in a financial transaction with these agencies, the information is promptly supplied to the credit bureau that stores the information and updates the information as and when fresh information is received.
The clientele of credit bureaus are not only financial institutions though. They also serve as an identity verifier. For example, many employers, before hiring a new employee, run a credit history check on the person. This not only verifies the identity of the person but also indicates how responsible the individual is. Credit worthiness of an individual not only indicates an individual’s financial stability but also points towards various other personality traits like responsibility and ability to manage. A bad credit score can certainly act as a deterrent and cripple the chances of getting a job severely. This factor has helped the credit bureaus in building a significant customer base comprising non-financial institutions.
The kind of information collected and stored by credit bureaus is extremely sensitive. As a result, protection of this information is extremely critical. In most countries, the credit bureaus are legally obligated to make sure that the information they collect are relevant, accurate and updated. They are also obligated to furnish the data pertaining to a certain individual to that individual. This is very important especially since the methodologies used by the credit bureaus to arrive at the credit score for an individual in considered to be a secret.