A credit bureau is an organization that collects information regarding credit histories of individuals and other related data. The collected information is then provided as a credit report on individual that can be used for various purposes. Primarily, this information is being used by lenders and other institutions offering lending services to learn the credit background of applicants.

Importance of credit bureaus

Credit bureaus are important because they help lessen the risk for lenders providing loans to more trustworthy borrowers. Lending is always a risky business. Lenders can easily lose a considerable amount if money and go out of business if they are not careful of who they are lending their money to.

Lending institutions need to make sure that their borrowers have the means as well as a credit history that show them paying what they owe. The best way to do this is by checking the information given by credit bureaus.

How credit bureaus work?

Credit bureaus or credit reporting agencies collect a person’s credit history that banks and other financial and lending institutions can assess whether someone is safe and good enough to extend credit to.

Whenever an individual applies for a loan or a credit card, these institutions usually go to credit bureaus that provide the credit history of applicants.

History of credit bureaus

Credit bureaus had their origins starting from when Lewis Tappan first established a system of collecting and sharing credit histories of individuals. Tappan, a businessman during the tough 1840’s needed to extend credit to customers in order to sell goods.

In order to minimize the risk on the people he extended credit to, Tappan started to keep detailed credit records of his customers.

The system of credit reporting established by Tappan was so good and accurate that other companies started paying him for some access to the records. Seeing an opportunity, Tappan decided to establish an organization that provided credit reports to other companies.

By the 1850’s, he was able to establish a nationwide network of credit reporting agencies composed of about 2,000 credit researchers. That is how credit bureaus began.