Almost two years have passed since hackers exposed the personal information of 148 million Americans held by the credit bureau Equifax. But the fallout continues. New laws passed in September make it free for all Americans to freeze their credit reports—a strategy considered among the best ways to stop criminals from using stolen personal info. (In the past, credit bureaus often charged for that service.) Yet much confusion remains about credit bureaus. What are they? What do they do? Can they be trusted to safeguard our private information? Here’s what you need to know about the industry today.
1. They exist for a good reason.
Any time you want to borrow money—whether it’s to buy a house or car, finance an education, or use a credit card—the company lending you the money needs to know you are trustworthy before it says yes. Similarly, landlords, insurers and sometimes even employers want to know you are financially trustworthy. Credit bureaus emerged out of this need. Most banks, credit-card issuers and other companies lack the resources to collect and review the financial background of everyone who applies for credit. So they agree to share financial information on their customers with credit bureaus, whose primary business is to consolidate and organize financial background on more than 200 million adult Americans. In return, by paying credit bureaus a small fee they get access to this information when a customer applies for credit. It is a relationship that has worked well since the late 19th century. (Equifax started supplying merchants with credit information as the Retail Credit Co. in 1899.)
2. The industry has consolidated.
There are dozens of smaller and specialized credit-reporting bureaus, but the three big ones are Equifax, Experian and TransUnion. They are the oldest, largest and most influential. Nearly every American is in their databases, and together they have billions in annual revenue.
3. It comes down to a number.
Credit bureaus take all the info they have collected about you and apply their proprietary algorithms to assign you a credit score. Depending on the bureau and its methods, scores can range from 250 to 900. The higher your score, the more likely you’ll be awarded credit, and the better deals you can negotiate when you buy a car or refinance a mortgage.
4. You have many scores.
It’s a myth that you have just one credit score. Because there are so many bureaus and so many ways of slicing the data, you actually have dozens. The credit-scoring company FICO, for instance, has specific algorithms for auto lenders, bank cards, mortgage lenders and even health care providers, each of which can be used by these specialized businesses to better gauge the risk of having you as a customer. But whatever the method of calculation, federal law requires it to be “empirically derived and statistically and demonstrably sound,” says credit expert John Ulzheimer, formerly of FICO and Equifax. In other words, there must be science behind it.
5. Mistakes happen.
Over the years, there have been numerous consumer complaints and legal actions against the bureaus for inaccurate reporting and illegal marketing. In 2015, for example, 31 state attorneys general won a collective suit against the Big Three over errors on credit reports. Included in that settlement was a $6 million fine and stricter standards for addressing consumer disputes and preventing mistakes in the first place. Another important provision: Medical debt cannot be included on a report unless it has been with a collection agency for more than 180 days.
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6. You can’t fight it.
Try as you might, you can’t opt out of any of this. It’s all perfectly legal and unavoidable. The system is so ingrained and complicated that even an expert like Ed Mierzwinski, a consumer advocate with the U.S. Public Interest Research Group who has been policing the bureaus since 1989, says he wouldn’t know where to begin to pull out of it.
7. There are watchdogs.
Given their clout, credit bureaus are regulated and scrutinized by the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB). These agencies’ oversight is based primarily on guidelines and rules set out in two major pieces of federal legislation: the Fair Credit Reporting Act and the Equal Credit Opportunity Act.
8. Selling fraud protection.
In recent years bureaus have expanded their businesses by selling credit-monitoring services that alert consumers to potential credit problems and provide identity-theft protections. It’s a natural evolution of their business. But outrage that Equifax appeared to be profiting from its data breach in 2017 is one big reason that Congress moved to make credit freezes free to all Americans.
9. Others want to profit, too.
The credit-reporting market has recently seen a proliferation of businesses such as Credit Karma, Mint, Credit Sesame and CreditWise. Some dangle the promise of a free credit report or score to entice you into purchasing other services; others try to get you to click on advertisements or sign up for deals from credit-card companies, insurance brokers and other lenders. They get paid when you do that. Most of these sites also have accompanying apps that make a game out of tracking your score, with tips for improving it.
10. Caveat emptor
Credit bureaus have sought to make money by offering identity-theft protections. But experts say you don’t need them. And beware of misleading marketing. “The FTC and CFPB have fined Equifax, Experian and TransUnion for deceptive marketing of these overpriced and generally unnecessary products,” Mierzwinski says.
11. Be vigilant with your scores
Even if you think your major life purchases are behind you, our experts say everyone should monitor their credit reports and scores regularly. You never know when you’ll decide to buy a condo in Margaritaville. It’s much easier to maintain a good score than repair a bad one. Negative information on a report typically lives for seven years; a Chapter 7 bankruptcy for 10. And older people with good financial histories can be targets for scam artists.
Joe Kita is a magazine editor and book author who writes frequently for AARP on fraud and money topics.