The History of Credit Reports

The Roots, Starting with the Nineteenth Century

How did the idea of credit reporting come about? Beginning in the 1840s, the mercantile agency brought thousands of American citizens—merchants, traders, manufacturers, and artisans—into a massive network of social monitoring designed to facilitate safe business relationships in a world increasingly inhabited by strangers.

Merchants dealt in a range of products, from hardware to groceries and would supply smaller, retail merchants with goods on credit. The merchants, in turn, sold their wares on credit to townsfolk and farmers, who were expected to make repayment after seasonal harvests. In effect, merchants became bankers to each other and the local communities they served. But as many merchants discovered, often through disaster, the traditional way of assessing a credit-seeker’s trustworthiness—direct experience, word of mouth, and letters of recommendation—proved increasingly unreliable. How could one distinguish between the upright and the unreliable?

The mercantile agency emerged precisely during this time to manage the growing problem of credit risk. The most important of these early agencies was established in 1841 by Lewis Tappan, an evangelical Christian and noted abolitionist who, after nearly going bankrupt from the Panic of 1837 - an economic crisis precipitated by a cascade of defaulted debt - sought to implement a national system of credit checking that would foster trust by commending the honorable and exposing the fraudulent purchasers, swindlers, and imcompetent traders for what they were.

The core of the Tappan’s “impartial” reporting system was a centralized library of large leather-bound ledgers. Together the agency’s volumes listed all known businesses in the U.S. and, most importantly, included detailed reports on the personal character, financial means, and local reputations of their proprietors. The problem was, they only collected the bad information, and, there was no verification that the information was correct, leaving the customer clueless as to where this data were coming from.

Subscribers to the service— wholesalers, merchants, financiers, and insurance companies—were granted tightly controlled access to this information for the purpose of making informed credit-granting decisions. Until the late 1850s, when coded reference books were first published, none of the information in the ledgers was available outside of the mercantile agency office itself. Subscribers had to physically visit the agency to make an inquiry, whereupon a clerk provided a verbal summary by reading directly from the ledgers. So assiduously was the information guarded that no written traces were permitted to leave the premises. Tappan’s system was continued by his successors, including Robert G. Dun, who took over in 1859 and ran the firm as R.G. Dun and Company. Some 2500 volumes of credit reports were filled by Tappan and his successors between 1841 and 1890.

The American mercantile agency was, in scale and scope, one of the most impressive apparatuses of social monitoring anywhere in existence during the nineteenth century. The history of contemporary surveillance technologies, especially in the U.S., would be incomplete without drawing closer attention to its development.

This is the case for several reasons. First, the mercantile agency is a direct descendant of the modern consumer credit bureau, an institution that functions with astonishing autonomy and “The Mercantile Agency System” influence in contemporary American society.

In the absence of certified financial statements--the basis of corporate credit assessment today--nineteenth-century commercial credit reporting was a study of individuals rather than faceless organizations. As nineteenth-century businesses were typically sole proprietorships or small partnerships involving two or three individuals at most, commercial credit reporting entailed investigations into the integrity of these specific people. These same principles and practices were subsequently applied to the determination of consumer credit risks during the early twentieth century. Though the mercantile agency was hailed by many in the business community as a welcome panacea, it also elicited strong resistance from those who abhorred the remote, seemingly inescapable system of monitoring that it entailed. “The systematic plan of espionage adopted and perfected by the `Mercantile Agencies,’ is far from being generally popular,” wrote an anonymous “Merchant of Boston” in 1853. “[T]he whole proceeding bears upon its face the most diabolical jesuitism that has ever cursed the world.” During the mid-1850s one journalist described credit reporting as “an organized system of espionage, which, centered in New York, extends its ramifications to every city, village, and school district in the Union. Spies are regularly employed by this institution to travel throughout the country, and secretly obtain precise information on the property, the The enormous power wielded by the U.S. consumer credit bureau is well known, but very few formal analyses of its functioning exist.

 

These were known as mutual protection societies and roundtables, and their scope was limited geographically. This soon proved to be an inefficient way for businesses to protect themselves from bad debt.

In the 1830s, the first, third-party credit reporting companies were established. They were one of the first businesses that attempted to be national in scope, and actually functioned much like a modern-day franchise. By having a centralized location, the credit reporting home office collected information from smaller, credit reporting companies from their regions.

They differed from "mutual protection societies" in that they allowed anyone to access the credit information -- for a price. These "branches" paid a percentage of their profits to their credit reporting company's central office in exchange for credit information from other locations. When the typewriter and carbon paper were developed in the 1870s, they discovered even greater efficiencies. The information that was accumulated was more widely available, more accurate, and covered a much larger geographical area.

This new credit reporting system had to deal effectively with four groups: their subscribers, the consumers and businesses about whom they reported, their branch office correspondents, and the general public. Learning to work effectively with and keep these groups happy, as well as competing with other CRAs, helped form the agencies we know today. Deciding the credit report make-up was another challenge.

Credit Reports Yesterday

As credit reporting agencies (CRAs) developed throughout the 1950s and 1960s, they took on the name “credit bureaus.” They began to track the behaviors of consumers in a specific county or town and primarily focused on serving one kind of creditor bank, finance company, or retailer.. These early credit reporting companies represented cooperative efforts among creditors in a specific region and were operated solely for the benefit of its members. They typically limited their credit-related reporting to negative or "derogatory" information (e.g., delinquencies or defaults).

For example, a group of retailers in a small town might have agreed to form a cooperative that kept track of customers who were considered delinquent by any member of the group. The individual merchants would then use this information in managing their own credit relationships with prospective and current customers. In addition to capturing name, address, and some loan information, these early agencies would scour local newspapers for notices of arrests, promotions, marriages, and deaths. These notices would then be clipped and attached to a consumer's paper credit report. Requests or "inquiries" from creditors to see a particular consumer's information would also be noted in the report. These inquiries would indicate that a consumer was requesting credit. In those early days and throughout the 1960s, the credit reporting business was industry specific in its focus. As such, bank-, retailer-, or finance-company-sponsored “bureaus” did not share loan or inquiry information with each other. This kept banks from knowing about loans or inquiries made by finance companies or retailers and vice versa. The situation limited any creditor's ability to understand a potential customer's entire debt situation. The political, technological, and market pressures that exerted themselves on the credit reporting industry during the 1970s played an important role in shaping the modern-day credit reporting company.

The decade began with passage of the Fair Credit Reporting Act (FCRA). Described in more detail below, the FCRA protected consumers by setting standards for accuracy of and access to their credit information. Subsequent to the FCRA's passage, the industry stopped reporting things like marriages, promotions, and arrests and focused its efforts on reporting verifiable credit-related information. This included both positive information, such as a consumer's ability to consistently pay her bills on time, as well as negative information, such as defaults and delinquencies. Also during this decade, the industry harnessed the power of computers and databases to process, organize, and report on credit data. Those agencies that adopted computer technology realized operating efficiencies that allowed them to move data faster and attract more business. This, along with the costs associated with migrating to computer-based systems, compelled smaller operations that were not yet automated to sell their files and exit the industry. As a result of this consolidation and in order to meet the demands of an exploding unsecured lending market, credit reporting companies started including lending activity from banks, finance companies, and retailers from wider geographic areas.3 By the end of the 1970s, a handful of companies, also called consumer reporting agencies (CRAs), emerged as leaders. Capaldi explained that in the tri-state area, TransUnion and TRW (now Experian) became the dominant players by acquiring or aligning themselves with many of the smaller agencies. Similar events played out in other regions across the U.S., contributing to the market penetrations that the three major bureaus still have today. By the start of the 1980s, the content, storage, and processing of credit reports had changed dramatically. More accurate information (e.g., names, addresses, and Social Security numbers) was electronically stored and accompanied by loan, inquiry, and public record information (e.g., bankruptcies, judgments, and liens). Histories that wereonce read over the phone to an inquiring business were now transmitted electronically.

Overall, computer technology, market forces, and the FCRA had provided credit
reporting companies with the impetus to transform themselves from "local associations" or “bureaus” that clipped wedding announcements from newspapers to "efficient integrated systems serving an entire society."

Disclaimer: The information provided in this site is not legal advice. All information is general information, some of which pertains to legal issues involved in the subject matter. Credit Matters Inc. is not a law firm and is not a substitute for an attorney or law firm. Your access to and use of this site is subject to additional terms and conditions.

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