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[T768]The Three Credit Reporting Agencies

by Nick Adama, Nic

Credit rating agencies compile consumer information that they receive from lenders and other related companies and assign borrowers a score based on their short and long term uses of credit. They exact methods used to assign one score or another are not nearly as important, though, as how much weight lenders place on credit reports when determining whether someone deserves a home or not.

During the housing boom, virtually the entire loan application process depended on the borrowers' credit scores. If a home buyer had displayed responsible use of credit, a prime loan was almost guaranteed, while debtors with lower credit scores were often given subprime mortgages to purchase or refinance a house. In any event, other qualifications like down payment and stable income history became far less important than having a high credit score.

One of the maxims of stock market investing has always been that "past performance is no indication of future results." However, this is exactly what mortgage lenders were counting on by giving huge sums of money to people who had good credit histories but little money or other resources to meet a financial hardship. Wall Street was willing to give mortgages to people and then hoped that they would pay reasonably on time, since they may have done so somewhat consistently in the past.

With the right subprime lender, even previous foreclosure victims and those who had filed bankruptcy numerous times in the past could obtain a loan to purchase a new house. Some banks specialized in such difficult to place mortgages, knowing it would be easy to increase fees and the interest rate of the loan because of the poor credit history. This meant more income for banks, investment firms, and investors, until the homeowners inevitable defaulted on their mortgage again.

The ratings agencies did not substantially alter their methods of scoring loan applicants or borrowers in general during the run-up in housing prices from the late 1990s to the middle of this decade. It was mortgage lenders that ignored other previously important loan qualification criteria and placed too much faith in simply having a good credit score. And having a somewhat poor credit history just meant more fee and interest income for the banks, so even that was no barrier against obtaining a mortgage.

While home prices were rising every year, this strategy made some sense for the banks, who could just loan money to everyone, collect the payments, and then foreclose on the house later on if necessary, selling it for a profit on the open market. But when home values began falling, investors realized they had been stuck with toxic loans going delinquent by the hour, and no one was buying the foreclosed properties at all anymore, let alone at a profit. Many lenders went out of business, while others began to tighten up lending guidelines.

It was at this point that the credit rating agencies began to take a more traditional role in the lending process. A good credit score more important than having any credit score at all, and mortgage companies began to focus on other factors like down payments and having a job that produced enough income to pay the mortgage. This is a more reasonable role for credit agencies, as a guide to assist mortgage companies in viewing a complete picture of a borrower's ability to pay a loan, instead of as the sole determinant of fee and interest income for every loan applicant.

They are independent agencies collecting credit information. The second parties are merchants. They pay for the credit information as and when they need it. Now, you can say that relations are need based. The credit bureaus provide credit information to those business merchants who pay for their services. Merchants are as good as subscribers subscribing for the information. Generally, it happens in every business. The main focus of credit bureaus is to satisfy the demands of their customers ***** subscribers who are in need of credit information regularly.

In the credit market, your reputation is always under scrutiny. As and when you ask for the credit and approach to a local merchant, the merchant immediately establishes relations with the credit bureau and ask for information about your overall credit reputation. This credit reporting system helps the merchants to evaluate the risks in extending you credit.

Credit bureaus have no role to play in the decision making process of approving or disapproving the credit. They are just like reporters simply collecting information and passing/selling it to others who need it to know the credibility of their customers. The information related to your repayment is collected from the credit institutions or the merchants from whom you have already borrowed credit. Then this information is handed over to the new credit institutions or the merchants from whom you want to borrow fresh credit. But one thing is that credit bureaus generally maintain some strategies as to how the evaluation is to be made on the bases of available informations. This information proves to be the most significant factors while taking decision on approving fresh credit to an individual, group or company. The merchants giving you loan or credit will verify everything about your past history in repaying loans; they will consider your ability and willingness to repay the loan and will take a note of your other material or non material assets while approving of the credit asked for. They grossly calculate your present and future financial obligations and your ability to meet such obligations. This is done simply to reduce the credit risk as much as possible.

This system has its shortcomings too. Such shortcomings are the offshoots of the relations between the credit bureaus and the merchants. Here, you are totally ignorant of how information is being collected; what is considered merits and what demerits. You will not be given any opportunity to prove yourself honest particularly in financial transactions. The reality people smell is that the merchants generally try to avoid bad credit risks, and the credit bureau provides such tainted information that will help the merchants denying you of the credit. That is how the credit bureaus help the merchants and make profit. You do not have the knowledge of the credit bureaus and the pieces of informations they tend to provide to the merchants. Your interest and honesty are not being heard. This is, however, the workings of the credit reporting system.

It often happens that without proper documentation of errors, the credit bureaus rely on information as reported by subscribers, and assess negatively. The credit bureau wants to be on the safe side since the merchants or the subscribers will not verify such information provided to the merchants on credit repayment and financial status of the customers. Nor do the merchants complain against the bureaus or the subscribers. The main aim of the merchants is to ensure that their investment must fetch maximum profits, and not get it lost. It's clear that the system runs on, to a great extent, on speculations. If the merchants meet any loss or so, they will first and foremost criticize the bureau for not providing negative information which would have prevented the merchant from tendering credit to the customers concerned.

A few aspects are important to discuss. Every credit bureau tries to maintain accurate information as it seems to be financially feasible. At the same time, they know the limitations of quality control. Therefore, they like to be on the safe side by highlighting more negative aspects and less positive aspects of the tentative customers. They realize that if they do err, it is better to err on the negative side rather than the positive side.

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Both Nick Adama & Huzef are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Nick Adama has sinced written about articles on various topics from Foreclosure Help, Bankruptcy Law and Foreclosure Help. Nick writes articles designed to help homeowners while they still have time to spare. Visit his site to learn more about how to save your home:. Nick Adama's top article generates over 90500 views. to your Favourites.

Huzef has sinced written about articles on various topics from Free Credit Report Score, Computers and The Internet. . Huzef's top article generates over 720 views. to your Favourites.