How The Credit Reporting
System
"Works"
The credit reporting system is a
business relationship between two parties:
1) independent agencies that
collect credit information called credit bureaus; and
2) merchants who pay
for a copy of this credit information on an as-needed basis.
 Credit
bureaus refer to these merchants who pay a fee for their service as
subscribers. As with any business, the main focus of the bureaus is to
meet the needs of their customers, the merchant subscribers (not you).
When you apply for credit with a local merchant, the merchant turns to
a credit bureau to obtain a copy of your "credit reputation" to
help him evaluate the risks in extending credit to you. The bureau doesn't
actually approve or deny your credit, but rather supplies the merchant
with your payment history as reported by other subscribers with whom you
have received credit. However, the bureau will use a closely guarded
secret formula to assign a credit score to each individual based on the
information in the file. This information is the most significant factor
in the merchant's decision regarding your "ability and
willingness" to meet your future financial obligations. The merchant
is counting on the credit bureau's information to serve as a filter to
help separate good credit risks from poor risks.
The shortfall of this system is that the product, you, has little clout
in this relationship. The merchant's primary motivation is to avoid bad
credit risks, and the bureau makes a profit by charging the merchant for
helping him do that. The consumer has no positive financial impact on the
bureau. Thus, while you are out of the loop, you are surrounded by it.
If that weren't enough, you also have to compete against human nature.
Without documentation of errors, the bureaus are inclined to report
information as reported by subscribers--assuming the negative. After all,
the merchant/subscriber is not going to complain because he didn't like
what he saw on your file and thus didn't extend credit and didn't lose any
money. Any losses for not taking a risk are speculative and argumentative,
certainly not tangible. The only decisions that might draw criticism from
the merchant are the losses as a result of the bureau omitting some
negative information that would have caused the merchant to have declined
extending credit.
This is not intended to make the credit bureaus appear the great
"evil empire" that some have made them out to be. They are huge
bureaucratic companies whose policies have evolved from simple business
economics and human nature. Every credit bureau desires to maintain as
accurate information as financially feasible, but at the same time they
realize the quality control limitations dictated by competition and
operating costs. And they realize that if they do err, it is better to err
on the negative side rather than the positive--if they are going to serve
their subscribers' best interest. Although they want to develop as
truthful a portrait of your credit history as possible, human nature
compels them to give highest priority to recording any remarks that might
be true and might keep their customer-base from entering into a risky
credit arrangement. After all, that is their service, and nothing
directly impacts their bottom line any greater.
It's much like having a
mechanic check out an automobile before you
make a decision to purchase it. The mechanic is put on the spot. If he
tells you it's a good car, and it breaks down on you, then he looks bad.
He'll never be burdened with your complaints about the three he
blackballed, only the one he okayed--if it should break down on you.
Human
nature compels him to go into the situation looking for what's wrong, not
what's right. You are about to make a major financial decision based
mainly on the information your mechanic gives you. Similarly, the merchant
may be making a comparable investment based on the information provided by
the bureau.
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