History of Credit Bureaus, a story about how they got started. Part 1.

Let us take a little look at how credit bureaus came into existence. Back around 100 years ago, if you applied for a loan, your credit file was ordered from the local credit bureau (all credit bureaus were local back than).  These bureaus were regional, and often times very small. A secretary went in the back office, and pulled out a paper file with the person’s name on it. Someone would look at the file and decide if they would offer you credit . If there was a questionable marking or error on the file, a simple phone call or visit to the office could clear the matter up. Since there were no computers, this was a manual process.

Credit reporting agencies, also referred to as credit bureaus, were first established by local retail stores and personal finance companies to share information about their customers. In 1906, the bureaus established a trade association called the Associated Credit Bureaus (ACB), to help facilitate the sharing of credit related information across the country. Apparently credit reporting was a hit because the membership of the ACB grew substantially, as did the number of people covered.  However, as late as the 1960s, technological limitations restricted the coverage of even the largest credit bureaus to only a few cities. Remember that computers were not used during these times, it was a manual process.

Back then, credit bureaus would collect every bit of information they could about a person, including employment history, marital status, age, race, religion, testimonials, and any other information they could get their hands on. With all that information at their fingertips, discrimination was not uncommon. Today, using these types of criteria are illegal.

A whole lot has changed since then. For one, laws prevent credit bureaus from discriminating or storing whatever they want. Second, the corporate titans have bought up all the local credit bureaus monopolized the business (The three bureaus are Experian, Equifax, and Trans Union). Another change is the use of computers. Storing all those files in file folders in the office and having a human personally review each file to make a lending decision became downright unmanageable as well as unprofitable. The advent of computers has allowed credit bureaus to maintain files on millions of people. Now, instead of having a person review each file, the computer uses a mathematical model and instantaneously spits out a number known as a credit score. The entire credit reporting system is now automated and lenders make credit decisions in minutes compared to what formerly took days or weeks.

The Fair Credit Reporting Act (FCRA) was passed to add accountability to the credit reporting process. Unfortunately, the FCRA did not fix credit reporting system’s problems. The problem with the bureaus today, is that by having a computer make decisions you are bound to errors, in fact 79% of Americans have at least one major error on their credit.

Stay tuned for part two where I will explain about how FICO came into existence, and how to improve your credit.