When you sign a credit agreement with a credit grantor, somewhere in the fine print that no one ever bothers to read is authorization for the credit grantor to share information with a credit reporting agency. So, you did give permission to the credit grantor to share information with the bureaus. Take a look at the credit application you signed.
What the bureaus do is compile the information and store it in a time series of snapshots of an individual’s credit behavior. Number of trade lines (individual credit accounts) open, number of current, 30, 60, 90 days past due trade lines, total credit limits, percentage of credit limits utilized, etc., etc., etc., are stored. Public record information is augmented (bankruptcy filings, court judgments, etc.) to that data. Credit grantors who are deciding whether or not to loan you the money for your new car or home, or to issue you a credit card, use that information - most often in the form of a score (e.g., FICO) built on that data - to predict risk and make an optimal decision (accept, reject, accept with limit conditions, etc.)
Having that information available reduces risk, and lowers the cost of credit.
There are three major bureaus (Trans Union, Equifax and Experian.) There are regular attempts to create a fourth bureau or to create other predictive databases, but they have not succeeded.
I’m not defending Equifax in this data breach issue. Their site indicates that I am likely among the 145.5 million who were accessed in the breach. Not too pleased by that, but unwilling to accept their arbitration-limited set of remedies. I’ll wait and see and preserve my right to participate in class action settlements.
That said, credit bureaus perform a clearinghouse function that systematically reduces the cost of credit. If you could throw a switch and make them disappear tomorrow, lacking that information, credit grantors would have to raise the cost of credit to cover the increased risk.
What about my idea of putting any cash reserves in CDs at a local bank, doing no transactions involving them online?
Excellent summary.
And just to add another example of massive power the agencies unilaterally have over us:
Let’s say you had a $30 bill from a dentist. Because the temp dope in the dental office misspelled your name and address, you never got the bill and the dumshxt couldn’t contact you. So they put the bill out for collection, and that $30 collection account shows up on all 3 of the credit agencies.
You have $8 million in the Big Bank you use, and decide you want to buy a vacation home, don’t want to use all your cash, and go in to your bank for a $3 million loan on a $6 million home.
From that $30 collection account, your FICO credit score on all 3 agencies just went from a perfect 800+ to under-650 deadbeat status, no matter that you’ve paid back several million-dollar RE loans, several $200k auto loans, thousands of dollars in credit cards you pay monthly, and still have $5 million in the bank. The logrythms they use to predict your credit-worthiness are of course so ingenius, you know...
Your rate on that prospective loan just went from 3.8% to over 5% because of that $30 collection caused by dental dumshxt.
Now if the bank has an actual person underwriting your loan request, you’ll get your loan, but the Big Bank may have to go through 25 layers of bureaucracy to do it. And that’s only because you have that big bank account.
Credit reporting agencies OWN applicants, and while you are absolutely right that it makes credit affordable and generally is good for that reason, the power they have over your personal financial plan (when some idiot at a dumshxt dental office screws up) is just mind-numbing.
This example isn’t about me (unfortunately lol) but in my job, I personally have witnessed similar scenarios often. And while the 1-percenters can say it’s more ridiculous in their case, it hurts thousands of us ‘little guys’ far worse.