SIC 7323
CREDIT REPORTING SERVICES



This industry includes establishments primarily engaged in providing mercantile and consumer credit reporting services. Examples of such establishments include consumer credit reporting bureaus, credit bureaus and agencies, credit clearinghouses, credit investigation services, and mercantile credit reporting bureaus.

NAICS Code(s)

561450 (Credit Bureaus)

Industry Snapshot

Credit reporting services are a prime source of credit information for both consumer and mercantile (business) markets. Although there are numerous credit reporting agencies operating all over the United States, with most specializing within specific industries, the services they offer are usually limited to reference books, ratings, recommendations, and reports. Some agencies, such as Dun & Bradstreet, provide all these services, whereas other agencies may offer only one or two. Whereas reference books, ratings, and recommendations are primarily used by credit managers, credit bureau reports can be used by others to verify that individuals or firms have listed all of their debts and provide valuable clues about individuals' or firms' payment behavior. Marketers may also use such information to effectively segment their markets based on credit performance criterion.

The industry is dominated in the United States by three credit bureaus: Equifax, Experian, and Trans Union. These companies compile data from public records and creditors to create credit reports for over 200 million Americans. All three companies maintain a contract with an independent company, Fair Isaac, which transposes the data into a credit score. Credit scores range from 350 to 800 points, with score of 620 or above considered good. Access issues and consistency among reporting bureaus generated controversy in the 2000s. In 2003, 75 percent of mortgage lenders and 80 percent of large financial institutions relied on credit scores to assess credit risk.

Organization and Structure

Most credit bureaus are either owned by or under contract agreement with one of the United States' three major consumer credit reporting agencies: Equifax, Experian, and Trans Union. These national agencies maintain centralized computer databases that contain the credit records of more than 200 million Americans. Similarly, agencies such as Dun & Bradstreet Information Services provide credit information on more than 10 million U.S. businesses. Credit bureaus generate more than a half-billion credit reports every year and two billion pieces of information about consumer trade activities are entered into consumer credit records each month.

Consumer and mercantile credit are the two broad categories of services that are offered by the credit reporting agencies in the United States. Consumer credit is the medium of exchange that an individual consumer may offer to a seller of goods or services or to a lender of money. Consumers use credit to obtain items in the present and pay for them at some future time. Despite the fact that virtually every person in America eventually has contact with some phase of consumer credit, the extent to which consumers use credit varies. Consumer credit reporting services provide information on retail, service, and cash credit. These services gather and evaluate information on a consumer's credit activities for his or her lifetime. Based on this information, agencies provide a consumer's credit rating to the party seeking credit information.

Consumer Credit. Retail credit is sought before processing retail sales to consumers. The sale may take place as a revolving credit, an installment credit, or an open charge transaction. Credit reporting services are critically important to the business of retail credit. For example, credit reporting services provide information on each consumer that applies for retail credit cards such as American Express, Visa, or MasterCard. Credit reporting agencies are also extensively used to check the credit status of mortgage applicants. Many retail outlets that provide installment credit, which is a plan that allows a customer to pay in several installments, also use credit reporting agencies in a similar credit-check fashion.

Service credit consists of credit provided to consumers for services rendered, such as those by doctors, dentists, and lawyers, or for the use of gas, electric, or water utilities. The credit reporting services provide credit ratings for consumers of these service organizations.

Cash credit involves lending money directly to consumers. Organizations such as consumer finance companies (sometimes called personal finance companies or small loan companies; commercial or industrial banks (personal or consumer loan departments); credit unions; insurance companies; and other types of lenders seek the service of the credit reporting establishments. They request advice from these companies before approving the loan and consequently providing money to the consumer.

Mercantile Credit. Business credit is one of the principal means by which business executives can translate opportunities into productive ventures. Credit reporting establishments provide two types of services to the organizations seeking business credit information: commercial and cash credit.

Commercial credit is extended when a manufacturer or supplier provides goods to another party (an intermediary, wholesaler, or final retailer) for resale to the consumer. Credit reporting services are used extensively in this area due to the volume and the value of goods exchanged. This is especially true when a supplier is conducting new business with an unfamiliar party. In this case, credit reporting services are used to provide information in the form of a credit rating that contributes to the critical final credit evaluation.

Cash credit allows businesses to borrow cash to acquire both current and fixed assets, which it agrees to repay on a long (over five years); intermediate (one to five years); or short (less than one year) term basis. Organizations such as commercial banks, investment companies, insurance companies, commercial finance companies, and even individuals seek credit information about businesses before lending them cash.

Types of Consumer Credit Reporting Agencies. Information about the credit position of individuals and families may be purchased from many sources. Since credit investigations have become extremely specialized, organizations usually rely on specialists. Credit information in the files of specialized credit reporting agencies can be used more than once. In fact, multiple use of the same information is the principal on which a consumer credit reporting agency is founded.

There are several types of consumer credit reporting agencies. Some agencies serve a wide geographic area with their own computer database. The primary source of their data is accounts receivable tapes of credit grantors and public record information. The four major credit reporting firms in the United States are Equifax, Experian (formerly known as TRW Information Services), Trans Union, and CSC Credit Services.

Some agencies operate by contract arrangement with the large computerized reporting firms. Such agencies pay a monthly fee for the access to the file data. Any credit bureau has access to the records of all other bureaus. The credit file of an individual who moves from one area of the country to another is available to credit businesses in a new community through inter-bureau reporting arrangements. Therefore, computerized bureaus have instant access to the credit histories of millions of people.

There are three types of commercialized sources of credit information. The general mercantile agency, Dun & Bradstreet Inc., reports on any business enterprise in response to subscribers' credit inquiries. The Business Credit Reporting Service of the National Association of Credit Management operates for the systematic exchange of ledger information among members. And the Specialized Mercantile Agencies reports on business enterprises in particular lines of trade at subscribers' request.

An annual or monthly fee is usually charged for credit reporting services, and is billed to all members according to the membership contract. A per report cost is also charged, which varies depending on the type of report required and the format in which it is received.

Operation of Consumer Credit Bureaus. Credit bureaus must maintain control of the data they collect. To comply with the Fair Credit Reporting Act, credit bureaus must carefully check on the identity of all that request credit information. Individuals or firms that are not members of the bureau can purchase reports if they have a legitimate need and are properly identified. The Fair Credit Reporting Act lists permissible purposes for obtaining consumer credit reports.

The information needed to create a credit report is gathered from a variety of sources, located in one or more trading areas that are willing to exchange information. Credit bureaus try to secure data from as many creditors and other sources as possible. Bureaus obtain ledger information from credit grantors, verify employment with employers, and collect credit-related public records from courthouses. The present status of the consumer is of most importance, but the reader of a credit report is usually greatly interested in the historical status as well (i.e., how often the consumer was significantly late in paying bills).

Credit bureaus check public records regularly to gather credit-related data. A bankruptcy, lawsuit, judgment, or divorce may affect a consumer's paying habits regardless of his or her previous record. Also, as the population becomes more mobile, consumers make many purchases outside their local trading areas. Under these circumstances one credit bureau must request a credit report from another bureau. Through an inter-bureau reporting system, the record of an individual in other markets is readily available.

In using multiple sources of credit information, credit bureaus distinguish between facts and statements of opinion. According to Associated Credit Bureaus, Inc., consumer credit reports contain personal information such as: a person's name, last reported address, social security Number, date of birth, marital status, spouse's name, number of dependents, previous addresses, and employment information; a listing of the consumer's credit information, including credit account numbers, the creditors' name, the amount of last payment, the credit limit of the account and the timeliness of the credit payments; a listing of public record information, such tax liens, court judgments, and bankruptcies; and an inquiry section that lists all creditors who have reviewed a copy of the credit report. This final section is particularly important for consumers to examine when they receive a copy of their report because it acts as an audit trail to ensure that no unauthorized parties have accessed the report.

Credit reports once included opinions of credit grantors and even comments about the subject's parents. But now credit bureaus refuse to place any information other than verifiable, factual data in their files. Credit reports do not contain any information about a person's character, lifestyle, race, national origin, religion, medical history, political affiliation, sexual preference, friends, or relatives.

Legal Aspects of Credit Reporting Business. Section 602 of the 1971 Fair Credit Reporting Act regulates the credit reporting industry. The act established, among other things, the length of time that adverse information may remain in a credit file. This legislation bars the inclusion of "bankruptcies … which antedate the report by more than 10 years …, suits and judgments which … antedate the report by more than seven years or until the governing statute of limitations have expired …, paid tax liens which … antedate the report by more than seven years…, accounts placed for collection … which antedate the report by more than seven years,…any other adverse item of information which antedates the report by more than seven years," according to section 605 of the Fair Credit Reporting Act. The Federal Trade Commission (FTC), which is responsible for enforcing the act, has announced interpretations that have affected credit reporting organizations' mode of operation. For instance, if a credit grantor declines credit privileges to an applicant based on information in a consumer credit report, the credit grantor must advise the applicant and provide the name and address of the credit bureau.

Since the Fair Credit Reporting Act became law, credit grantors have been extremely conscious of the definition of a credit reporting agency. Legally, if a credit grantor relays third party data as distinguished from its own ledger information, it becomes a credit reporting agency itself. For example, if an electronics appliance store calls a clothing store about a consumer's paying habits and the clothing store provides secondhand information learned from a utilities company, the clothing store is then deemed to be a consumer reporting agency and is liable for all the record-keeping and interview procedures required in the Fair Credit Reporting Act.

One of the most important provisions of the act is the right to know the contents of one's own credit records. The law provides that every consumer reporting agency reveal, upon request and proper identification of the consumer, the contents of all file information on the consumer, the sources of the information, and any recipients of reports on the consumer. Furthermore, the law states that a consumer cannot be charged for a report if, within the past 30 days, the consumer has been denied credit because of a report from a credit bureau or has received a notice from a collection department affiliated with a credit bureau. The act also allows individuals the right to challenge the accuracy of information and have it reverted, updated, or removed. Individual states also have their own laws that deal with credit reporting.

Background and Development

Local credit bureaus are primarily a twentieth-century development, though credit has long been a feature of American business. The first credit bureau was founded in the middle of the nineteenth century, but the growth and development of credit bureaus was slow prior to World War II. For a long time, retailers who sold on credit either operated their own system of checking a consumer's financial resources or, in the case of small retailers, advanced credit to neighbors who they knew from daily interactions. As cities grew and merchants could no longer keep up with the demands of either knowing or checking on their customers, they increasingly turned to credit bureaus for assistance. Credit bureaus have become the main clearinghouses for information provided by their subscribers, members, and other outside sources. Furthermore, credit bureaus are the quintessence of close cooperation within businesses serving the American population.

In the nineteenth century, the possibility of securing organized and factual data on business organizations was extremely remote. Credit decisions were usually hit-or-miss affairs. As a result, business experienced large credit losses that had to be offset by greater margins of profit. The impetus for developing the first organized sources of credit information grew out of the uncertainties and losses experienced during the economic panic of 1837, the rapid changes in the country's economic structure, and the expansion of trading areas. Manufacturers and suppliers needed credit to trade over wide geographic areas. This implied that credit judgment could no longer be based on personal relationships, nor could adequate information be gathered in the immediate vicinity of the creditor. Consequently, a system of organized credit reporting evolved to eliminate some of the major uncertainties of trade.

In 1841, Lewis Tappan, widely acknowledged as an excellent judge of a credit risk, organized the Mercantile Agency to collect and disseminate information for the benefit of creditors. Though the agency had its headquarters in New York City, Tappan developed a branch office system to penetrate major trade centers. R. G. Dun, an employee of the Mercantile Agency, became the sole proprietor of the company in 1859 and changed the name to R. G. Dun & Co. In 1849, John M. Bradstreet, an attorney in Cincinnati, founded the Bradstreet Company, which operated in a manner similar to the Mercantile Agency and served the same areas of trade. In 1933, the two firms merged to form Dun & Bradstreet, Inc.

Another commercial credit reporting agency includes the Business Credit Reporting Service of the National Association of Credit Management (NACM). The NACM was organized in 1896 to cope with the growing problems of fraud, misrepresentations, interstate commerce, absence of a uniform federal bankruptcy law, and increasing demand for credit. From a humble beginning of less than 600 members, NACM represented 30,000 member companies by the late 1990s.

Origin and Growth of the Credit Association Bureau. The organized exchange of consumer credit information between local regions started in the early 1900s. In 1906, William H. Burr, owner of a credit company in Rochester, New York, had the managers of several other consumer credit reporting agencies meet with him and discuss the possibility of forming a national association of credit bureaus. Their cooperation gave birth to the sole national organization of credit bureaus, then called the National Association of Retail Credit Agencies, now known as Associated Credit Bureaus, Inc. (ACB).

Today ACB is one of the most active trade associations in the credit reporting industry, representing more than 1,450 consumer credit, mortgage reporting, and collection service companies, and offering its members such varied benefits as interbureau reporting rosters, standardized reporting forms, trade publications, educational services, credit bureau research, and annual meetings and conferences. ACB also operates a comprehensive certification program leading to the designations ACB Certified Credit Reporter, ACB Certified Collector, and ACB Certified Credit Interviewer.

Current Conditions

The three major credit bureaus all gather information independently of one another. Because some creditors may only report to one or two bureaus, the information gathered is not consistent. The result is that the same individual can have three different credit scores, generated from three different reports. How lending institutions use these scores also varies greatly. Mortgage lenders usually buy all three scores, but do not usually average them. Whereas some lenders take the middle score, those looking for business may opt to focus on the high score, and conservative lenders may take the bottom score.

Credit score can impact the interest rate a consumer is offered from the lender: the higher the score, the lower the rate, and the lower the score, the higher the rate. "In some cases, a 50-point difference would have no effect on your auto insurance premium," Bernie Birnbaum of the Center for Economic Justice told Money. "In other cases, it could double it." According to a study of over 500,000 merged credit reports conducted in 2002 by the National Credit Reporting Association, 29 percent of all consumers had scores that ranged more than 50 points. Because of the weight that credit reports carry in determining credit worthiness, consumer advocacy groups are pushing for more transparency in the credit reporting industry, as well as better safeguards against reporting errors.

Consumers can purchase their credit reports to ensure accuracy. In 2003 Equifax sold reports directly to consumers for $12.95 per report; a Trans Union report cost $9.00. Direct-to-consumer sales exploded in the early 2000s after legislation was introduced at both the state and federal levels requiring credit bureaus to disclose consumer credit information, including scores, to consumers. Forced into the direct-to-consumer business, the credit bureaus suddenly realized the extensive growth potential for the market.

Due primarily to direct-to-consumer sales, the credit reporting industry is expected to grow substantially through the remainder of the decade. Consumer-based sales of credit scores and reports were approximately $200 million in 2002 and are forecast to increase to as much as $1 billion by 2005. Although third-party resellers control approximately 75 percent of the direct-toconsumer market, the three credit bureaus are expected to use their access information as a strategic advantage to up their stake in the market.

Industry Leaders

Equifax Inc. posted a net income of $178 million on revenues of $1.1 billion in 2002. One of the largest credit reporting services in the nation, Equifax retains information on some 400 million credit holders. Equifax was founded in 1899 to provide local Atlanta businesses with individuals' credit histories. The young firm diversified into the investigation of insurance applicants' backgrounds, and later expanded into other industry segments. By 1973 the company had grown so large that the Federal Trade Commission filed an antitrust suit against its consumer credit division; the suit was dropped in 1982. During the 1980s and early 1990s Experian facilitated growth through acquisitions in the United States and across Europe. By the end of the decade, it sought to establish a beachhead in the fertile Latin American market.

Moody's Investor Services—owned by Dun & Bradstreet until that company split in two in 2000—is one of the world's largest providers of business, commercial-credit, and business-marketing information services. Founded in New York in 1841 as one of the first commercial credit-reporting agencies, the firm expanded overseas in 1857. Two years later it launched the Dun's Book , containing information on 20,000 businesses; that number surpassed one million three decades later. Since the 1960s Dun & Bradstreet has pursued a strategy of growth through acquisitions, including that of Moody's Investors Service. By the late 1990s it had operations in 37 countries and a global database that covered more than 57 million businesses in more than 200 countries. In 2002 Moody's Corporation, the investor service's new parent, posted a net income of $288.9 million on approximately $1 billion in revenues.

Experian Information Solutions Inc., another major player in the credit reporting industry, supplies consumer and business credit, as well as direct marketing and real estate information services. During 1998 the firm began shifting its focus from consumer credit operations to marketing information and services, causing credit information revenues to stagnate at $576 million in fiscal 1999, a relatively small portion of the firm's total revenues of $1.5 billion. Experian was formerly known as TRW Information Systems & Services, the group of information businesses previously owned by TRW Inc. In November 1996, U.K.-based Great Universal Stores PLC purchased Experian for $1.7 billion. Headquartered in both Orange, California, and Nottingham, England, Experian maintains a database of some 780 million customers and had offices in 16 countries in 1999. It also holds a minority interest in Central Communication Bureau, Japan's third-largest consumer credit information agency. In 2002 Experian posted $1.6 billion in sales.

Founded in 1969, Trans Union LLC is the youngest of the nation's three largest consumer credit reporting services. In 1970 it introduced Cronus (Credit Reporting Online Network Utility System), the first online information storage and retrieval data-processing system to complement the automated techniques used by credit grantors. In 1980 the firm was acquired by the Marmon Group, a global association of manufacturing and service companies. By the late 1990s, Trans Union offered such products as credit reports, credit and insurance risk scoring models, target marketing systems, pre-employment evaluation reports, skip tracing and search tools, collection services, customized lists, and transaction services. It operated in the United States, Canada, Botswana, Chile, Hong Kong, Italy, Kenya, Mexico, Namibia, Peru, Puerto Rico, South Africa, and Spain. Parent Marmon Group posted revenues of $6.5 billion in 2002.

Workforce

According to the U.S. Department of Labor, Bureau of Labor Statistics, the credit reporting industry employed 170,450 people in 2001. About 7 percent of the industry's jobs were in management, which had a mean annual salary of $77,380. Chief executives reported a mean annual salary of $117,740, and general and operations managers reported a mean annual salary of $79,780. Administrative and office support occupations totaled almost 80 percent of the industry's jobs. The in-category position of account and bill collectors totaled over 42 percent of all jobs and paid a mean annual salary of $25,760. Customer service representatives, representing over 10 percent of all jobs, were paid an average annual salary of $23,650. Officer managers earned an average annual salary of $38,370.

Research and Technology

The explosion of using the Internet during the late 1990s has impacted the credit reporting industry significantly. In 1997 QSpace Inc. became the first provider of online consumer credit reports, available for a fee at www.qspace.com. This revolutionary move was quickly adopted by the industry's major players. By 1999 the Internet had become a convenient, fast, and inexpensive delivery channel of mercantile credit information, and similar delivery of consumer credit information is expected to become widespread in 2000.

Equifax, the industry's leader, began utilizing the Internet for delivery of both business and consumer credit information in late 1999. It also entered into an alliance with the portal Lycos to offer its products and services on a new co-branded Web site. Also in 1999, Experian launched several Internet-based products, including a verification-enhancement service.

Because of the ease and convenience of Internet delivery of credit information, the issue of consumer privacy has become an important consideration for credit reporting agencies. The sensitive nature of the information, as well as the strict regulations of the Fair Credit Reporting Act, has prompted these companies to foray cautiously into new technologically driven delivery mechanisms. It is likely that the U.S. government and consumer watchdog groups, which have been scrutinizing various Internet-related privacy issues during the late 1990s, will keep a close watch on such practices by credit reporting agencies.

Further Reading

Associated Credit Bureaus, Inc. Homepage , 4 December 1999. Available from http://www.acb-credit.com .

Chatzky, Jean Sherman. "Keeping Score: How Credit Scoring Really Works—And Why It Matters." Money , 1 March 2003,142.

Cleaver, Joanne Y. "Up Close and Personal." Collections & Credit Risk , April 2003, 26.

"Credit Information Segment Growth Slow in Third Quarter." Electronic Information Report , 16 December 2002.

Demby, Elayne Robertson. "Letting Consumers Know the Score and More." Collections & Credit Risk , February 2003,53.

Dun & Bradstreet, Inc., 12 March 2003. Available from http://www.dnb.com .

Duran, Nicole. "Urging State Rules, Group Cites Skewed Credit Report Scores." American Banker , 18 December 2002,6.

Equifax Inc. Homepage , 12 March 2003. Available from http://www.equifax.com .

Experian Information Solutions, Inc. Homepage , 12 March 2003. Available from http://www.experian.com .

"Fraud Detection, Consumers to Drive Credit Segment in 2003." Electronic Information Report , 24 February 2003.

Heller, Michele. "In Focus: Raise or Call—Lobbyists Assess Their Privacy Hand." American Banker , 31 March 2003, 1.

"Leading Credit Info. Providers Look to Retain Growth in 1999." Electronic Information Report , 17 September 1999.

"Marketing, Consumer Services a Boon for Equifax in 2002." Electronic Information Report , 3 February 2003.

National Association of Credit Management Homepage , 12 March 2003. Available from http://www.nacm.org .

QSpace, Inc. Homepage , 12 March 2003. Available from http://www.qspace.com .

Reddy, Tarun. "SEC on Fast Track to Credit Agency Regulation." Corporate Financing Week , 17 March 2003, 1-2.

Rehm, Barbara A. "Privacy Isn't Only Concern in Fair Credit Renewal Fight." American Banker , 2 December 2002, 1.

Serwer, Andy. "Credit Bureaus Exposed." Fortune , 28 April 2003, 131+.

"Study Blasts Inaccurate Credit Scores." Cardline , 20 December 2002, 1.

Trans Union LLC Homepage , 12 March 2003. Available from http://www.transunion.com .

U.S. Bureau of the Census Homepage , 12 March 2003. Available from http://www.census.gov .



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