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Credit Reporting: a Brief History

27-Aug-2012

Let’s take a quick look at how credit bureaus came into existence. Back in the good old days, if you applied for a loan, your credit file was ordered from the local credit bureau (all credit bureaus were local back then). A bookkeeper went in the back office, rummaged around for a bit and pulled out a paper file with the person’s name on it. Someone would look at the file and determine if they would offer you credit. If there was a questionable item or error on the file, a simple phone call or visit to the office could clear the matter up.

Credit reporting agencies, historically referred to as credit bureaus, and was first established by local retail stores and personal finance companies to share information on 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. Two world wars over several decades kept the entire industry in a slightly idle state but the baby boom and economy explosion of the late forties and early fifties brought the industry back to rapid growth and of course, use increased. However, as late as the 1960s, technological limitations restricted the coverage of even the largest credit bureaus to only a few cities.

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.

A whole lot has changed since then. For one, laws and regulations prevent credit bureaus from discriminating or storing whatever they want. Second, the corporate titans have bought up all the local credit bureaus and monopolized the business. Another change is in the use of computers. Storing all those files in file folders in the back office and having a human review each file to make a lending decision became downright unmanageable. The advent of computers has allowed credit bureaus to maintain their growth and increasing files on millions of people. Now, instead of having a person review each file, the computer uses a mathematical model and instantaneously generates a number known as a credit score. This credit score summarizes your credit worthiness based on your repayment history and other key factors. The entire credit reporting system is now automated and lenders make credit decisions in minutes compared to what formerly took hours or sometimes even days.

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. Another industry has now been created to help customers understand and manage their credit and others to repair damage done by identity theft and personal credit miss-management.

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