My article about the fallout from the Equifax breach had readers asking some questions about credit reporting agencies.

“I have often wondered why we even need someone keeping track of our business from a distance. Each person is different and has different criteria for wanting or needing credit.”

“Our government protects these reporting agencies. It would be enlightening to understand why.”

credit-card-square

I’m not so sure the government protects credit-reporting agencies. They have recently been subjected to much stricter regulations. If you’re asking why they don’t come down on them hard for being breached, they do sometimes levy some stiff fines. But when it comes to lax cyber-security practices, the government leads the way. They’ve exposed more personal information than anyone, thanks to highly questionable security practices. I mean, why password protect your servers?

The reason for credit reporting agencies is the sheer amount of credit that is issued. It is possible to judge each case individually, that’s known as manual underwriting. Back in the day, when a bank loan or a line of credit with the individual store was the only way of borrowing, that’s how it was done.  But with around 35% of all purchases being made with credit cards and around of 160 million Americans holding credit cards (with an average of 3 cards each), it would be pretty labor-intensive for every business to do a manual credit check and interview with each person who wants to buy a sofa or a pair of pants.

Also, doing a credit formula by the numbers from a distance can also eliminate any claims of bias. And people tend to want things right now these days. So if they go in and want to finance a washer and dryer, they want to take it home with them. They aren’t in the mood to wait for the appliance store to do some research or ask some personal questions to find out if they’d be a good credit risk.

Author and radio personality Dave Ramsey, who’s made a career warning people about the dangers of debt, often says that a credit score is really just an “I love debt” score because it only keeps track of what you’ve borrowed and if you paid it back on time. Your FICO score is determined by:

35% Debt history

30% Debt level

15% How long you’ve been in debt

10% New Debt

10% Type of Debt

You could have a bank account loaded with cash and make tons of cash purchases and still turn up with a rotten credit score.  Though, in their defense, past behavior is a pretty good indicator of future behavior… most of the time. But here’s the trick, if you don’t apply for credit, the credit bureau won’t need to access your information. Employers aren’t supposed to access without permission, though pre-approved credit card offers sometimes will. You can put a stop to most of that by calling 1-888-567-8688 and opting out.  But you may miss out on offers for lower rates on cards or home loans, etc…