Credit Info Center
Mapping the Credit Industry

Pull Back the Curtain

Our Credit Info Center maps out the credit industry. We pull back the curtains of the credit industry and how it all started. We examine the credit industry players, their motives, and how they make money. Why? Because once you understand the roles and motives of the credit industry players, then you can decide for yourself who to trust to help legally improve your credit.

Credit Info Center - The History of How it all started

Years ago, retailers used to allow local customers to buy on credit and they would keep a tab on how much was owed and when payments were made by their customers. This information was shared between the local retailers and used to decide whether to grant credit or not.

Often times payment histories were shared by simply making a phone call from one retailer to the other. In 1906, retailers formed a trade association called the Associated Credit Bureaus.

Credit Info Center - The purpose of the credit system

Our Credit Info Center determined the real purpose of the credit system was to increase sales by allowing customers to buy products and services before they had the money to pay for it. Studies have proven that consumers will buy more on credit than cash. Consider the fact that 70% of the United States economy is fueled by consumer credit spending.

Our Credit Info Center studies reveal that the credit system was not designed for the benefit of the consumer, but was developed by merchants for merchants to increase sales and reduce credit risks by sharing their customers' payment history with each other. So from the very beginning, the creditors have always been the intended beneficiaries of the credit industry.

This is an important point to remember, because it helps to understand that today the creditors are still the intended beneficiaries of the credit system, not you. Also, it's important to see that historically the credit information was kept in the form of handwritten documents and conveyed manually. So you can clearly see how inefficient the system was.

Credit Info Center analysis indicate that not only was the system inefficient, but it eventually created a number of problems for the credit industry. Credit cards entered the scene and began to spread quickly. Relying on customer information from such an inefficient credit system. Our Credit Info Center studies showed that this proved to be a big problem for credit card companies and banks.

They gave credit cards to customers they felt could manage credit, based upon the information reported by credit bureaus. A lot of errors occurred and the credit card companies began to take heavy losses. So credit bureaus began to lose credibility. The lenders couldn't trust the accuracy of the credit information being reported.

About the same time, our Credit Info Center evaluations indicate the Federal Government was being pressuerd by consumer protection groups and civil rights organizations to do something about the complaints of discrimination in home loans. So in 1970 congress created the Fair Credit Reporting Act to protect consumers in dealing with credit bureaus.

Our Credit Info Center determined the purpose of the Act was to force the credit reporting agencies to reform their system of collecting and reporting on the creditworthiness of consumers. It helped increase reliabiity and consistency to some degree, but didn't fix all the credit industry problems.

Inaccuracies and errors still plagued the credit reporting system. Considering the fact that your consumer credit history can make or break your finances, more reform was necessary. Interestingly enough, major changes came from within, by one of the key players in the credit industry: FICO.

Credit Info Center Analysis - The Credit Industry Players

FICO Credit Score

Our Credit Info Center analysis reveals taht one of the newest yet most influential players in the credit industry is Fair Isaac Corporation or you may know them as FICO. If you've ever tried to get a mortgage loan, car loan, insurance, or credit card you've probably heard of the FICO credit scoring model.

Our Credit Info Center research shows that although there are now several other credit scoring models, Fair Isaac Corporation actually developed the first scoring models in the late 1950's. But credit scores didn't really start gaining much attention for the general public until the late 1990's when mortgage lenders started using credit scores to underwrite mortgages.

Further Center Info Center research reveal that this was a big deal in the credit industry because it was the start of "automated underwriting" and credit decisions whereby businesses began to use computers to make credit decisions without any human involvement in the decision making process.

Basically, a lender sets guidelines for credit approval or denial. If your credit scores meet the minimum number required for granting credit you get approved, if not, you're usually denied; pretty simple right? Many creditors loved it because it sped up the credit process and allowed them to process more loans faster.

Also, some creditors decided to establish guidelines to systematically charge more interest for applicants with lower ranges of credit scores instead of flat out denials. It provided for pre-calculated credit risks.

It also provided lenders with an objective defense against accusations of discrimination in lending practices, loans could be determined solely based on credit scores, without a subjective review of credit report information.

But here's the problem. Credit scores were cloaked in mystery. No one knew how they were calculated or what really went into the algorithms of the scoring models. It was a black box.

Nevertheless, credit scoring models grew in usage and businesses soon began to use them for decisions that had nothing to do with lending money.

Eventually, employers used them for hiring and promotion decision, landlords used them as rental criteria, and insurance companies began to use credit scores for assessment of insurance premiums. Some utility companies (like TXU) even made plans to use credit scores as a means of determining energy rate charges for customers.

So FICO is a major player in the credit industry. However, our credit info center analysis indicate their scores are dependant upon credit information provided by the big 3 credit reporting agencies (credit bureaus?); the primary players in the credit industry.

Credit Info Center Analysis - Credit Reporting Agencies

You're probably already familiar with the big 3 national credit reporting agencies or credit bureaus, as they are sometimes called: Equifax, Transunion, and Experian (formerly TRW). I've heard many of my credit improvement clients say they feel intimidated by the credit bureaus because they thought they were part of the government.

Our Credit Info Center's research reveals that credit bureaus are not government entities but private businesses earning more than $4 Billion per year by gathering and selling your credit information. This is important to know because it sets the stage for you to gain confidence when dealing with the credit bureaus.

Think about it, if the credit reporting agencies are making billions of dollars selling your personal information, and credit is increasingly being used for important decisions affecting your life, shouldn't you have rights regarding how they use your personal information?

Not to bore you, but when the Fair Credit Reporting Act was introduced to the Senate in 1969, Senator William Proxmire stated "a |considering the growing importance of credit in our economy, the right to fair credit reporting is becoming more and more essential".

So it's very important to understand that the credit laws were enacted to protect YOU from how these private businesses use your personal information. Don't let them intimidate you. Get credit information and know your rights.

Let's talk some more about how the big 3 credit reporting agencies make money. Once you see behind the scenes, you'll understand the conflicts of interest between the players in the credit industry.

Basically, each player's interest is motivated by how they make money in the credit system. Sometimes these interests clash. But in every case, you can be sure that your interest is not their concern. So you have to get credit information and decide for yourself who you can trust to help improve your credit.

As I stated earlier, the first way credit bureaus make money is by selling your personal information. They collect your information from businesses the FCRA calls "furnishers". Furnishers include: credit card companies, collection agencies, banks, utility companies, finance companies, student loan providers, and even other credit reporting agencies.

Credit bureaus also collect data from you whenever you apply for credit. When you apply for credit you usually complete a credit application providing your name, address, social security number, birth date, and other information.

The creditor submits this information to the credit bureaus to request your credit report. They send the information to the credit bureaus electronically using what's called a "Metro 2" form. As you make payments to your lenders they update the information to the credit bureaus via the "Metro 2" form each month. The credit bureaus collect this information in their database.

The big 3 collection agencies sell two types of data: Consumer Credit Report Data and Direct Marketing Data.

Credit Info Center Analysis - Consumer Credit Report Data

When you apply for credit, insurance, or even employment, credit card companies, insurance companies, employers or landlords will purchase a consumer credit report from the credit bureaus to assess your creditworthiness.

They want to see how you pay your bills and decide whether they feel you will pay them timely or not. And in the case of employers, they use it to decide whether to hire you or if you'll get the promotion.

But the point here is the credit bureaus make a lot of money by selling the consumer credit reports to businesses that want to review your data to make credit decisions affecting you. Considering how many times you have authorized your credit to be pulled, you can see the credit bureaus are making a lot of money selling consumer credit report data.

Credit Info Center Analysis - Direct Marketing Data

The credit reporting agencies make money by selling your information to marketing companies that want to get data targeting certain prospects to offer their products or services.

For example, during a recent congressional hearing, Transunion reported that they earned over $6 million per year from MBNA (a major credit card company) by selling them certain credit information they used to target customers to make credit card offers. Again, this is insight from public congressional hearings and law suit depositions of credit bureau employees.

They could have requested a listing of consumers with no late payments and credit card balances above $10,000. They could be interested in sending these consumers offers to transfer their balances to a zero interest credit card.

Alternatively, another credit card company may order a listing of targeted consumers with credit scores of less than 550. They may be interested in sending credit card offers to consumers in need of re-building their credit. So they may offer higher interest rates and annual fees for a credit card with a very low credit limit.

Given these two examples, you can see that not all data has the same value to the marketers. Some may be willing to pay more for their data because they can make more money with it than others.

The point here is the credit bureaus make more money by selling negative credit information than accurate credit information. So they really don't have an incentive to correct your credit information. Yet it's interesting to me when I see TV ads from credit bureaus offering to repair your credit reports. It's like the fox watching the hen house! Do you see the conflicts of interest here?

Credit Info Center Analysis - Dispute Process Income

I recently read segments of a congressional hearing transcript and excerpts of several law suit depositions of credit bureau employees, and a report published by the National Consumer Law Center regarding the credit reporting system. This public information disclosed remarkable insider information regarding the credit bureaus and how they actually make money by processing automated credit disputes.

Here's how. Remember, the Fair Credit Reporting Act gives you the right to dispute inaccurate, incomplete, or unverifiable information included in your credit reports. It outlines the dispute process the credit bureaus are legally obligated to comply with.

Unless your dispute is considered frivolous, they must investigate all inaccurate information. Any inaccurate, incomplete or unverifiable information must be deleted within 30 days of the dispute.

The key is to understand that the credit bureaus don't make their money from you the consumer. They actually make most of their money from their real paying customers, the creditors who furnish the information.

In this case, they charge the furnishers of data a fee of $.25 per dispute when the creditors provide information that turns out to be inaccurate. The average dispute letter contains 5 disputes. That's $1.25 per dispute letter.

Yet because the credit bureaus outsource their automated dispute process to overseas companies that cost them as little as $.49 per dispute letter they make a profit of $.76 per dispute letter processed.

I know the math is a brain teaser but the point is there is an inherent conflict of interest here. The credit bureaus have no incentive to correct the inaccurate credit information in their database.

Once again, inaccurate information is of more value to them than accurate credit information.

So Get credit information and decide for yourself who to trust to help legally improve your credit.

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