How Credit Rating Agencies Work – Things You Never Knew!

How Credit Rating Agencies Work - Things You Never Knew!

Let me begin by saying that I believe there is much misunderstanding on how the credit agencies work, what their purpose is and how they affect your life. I feel that in many ways the system we have currently is broken and is in need of repair. There are 2 major issues with how the credit rating system has evolved in the United States and I’ll go into detail here now, I feel this is information everyone should know.

Who Do The Credit Agencies Serve

The first thing that needs to be understood when discussing the Big 3 Consumer Credit Rating Agencies – Experian, Trans Union and Equifax – is who exactly their customers are. If you think the Credit Bureaus are here to look out for you then you are severely mistaken; the customers whom they serve are banks and other lending institutions that provide quick loans bad credit.

Let’s think about that for a moment… When a business has a customer then the business needs to provide the best service and products possible for their customer, that’s basic good business. All successful businesses are customer centric and put all other concerns to the sidelines, they look out for their customers interests.

So what do banks and lending institutions want? They want customers who have a good likelihood of paying their debt but at the same time are not the highest tier credits, while it’s good safe money it’s not very profitable. Meanwhile on the other side of the spectrum are people who are a high credit risk and therefore have to pay the highest interest rates; very profitable but there is a big chance they won’t get paid back. That leaves us with the great middle where you have a good chance of getting paid back but still have to pay higher interest rates on borrowed funds. Shockingly enough, not really, the credit bureaus make it so that the largest group of borrowers is those in the middle tier credit brackets.

This is a system that is done intentionally to help their customers, to help them maximize their profits. The credit bureaus have arcane complex rules and formulas that they use to complicate and make it very difficult to have pristine credit. Their whole purpose is to make sure the groups of people in the top tier is kept to a minimum and that those who should be in the lower tiers are kept there for as long as possible. It takes a long time and a lot of hoop jumping to build up a good credit rating then just one little mistake and all of a sudden there is a negative trend on your profile and your score is chopped instantly 50 or 60 points.

Remember everything is designed to keep you paying higher interest rates for as long as possible.

Monopolies and Bureaucracies by Credit Rating Agencies

The second big issue with credit reporting agencies and with most big large bureaucratic institutions is their inefficiency and wastefulness. I’ve seen it so many times when big dinosaurs with monopoly control in their markets provide horrible service and benefit to the communities they serve and work with. These behemoths are the antithesis of what Capitalism is and should be, they are actually a form of Mercantilism and it is a sad thing to see. It’s not anything inherently evil or malicious it is a result of bloated bureaucracy. The culture has atrophied, Capitalism has died in these entities; the desire to provide excellent service and benefit is gone, the ability to act and move quickly is gone, the threat of competition is gone. This corrupted culture leads to so many problems I don’t even know where to begin.

The level of ineptness is shocking and disturbing. The credit bureaus have enormous power over consumers’ lives and it is a little scary to know that their interests and purpose lay elsewhere. These agencies serve an important and vital role but it’s important that as a consumer you are aware that they are not on your side.

What are your views readers?


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