Credit bureaus, also called credit reporting agencies (CRAs), are companies that compile and maintain information about your creditworthiness. There are three major credit agencies in the United States: Equifax, Experian, and TransUnion.
If you’ve ever owned any type of credit card or applied for a loan, then you’ll have a credit history. This is the history you’ve established with these agencies by either paying or not paying your bills on time, or not paying at all. Your credit history is probably the most important component of your financial life.
You’d be forgiven for believing that these credit bureaus are non-profit organizations that always act in the best interest of the consumer. However, that would be a major misconception.
Credit bureaus are privately held, billion dollar companies. Like other private companies, they exist for the sole purpose of making money. They maintain the largest national databases of consumer credit information. They make money by selling the information in your report to banks, mortgage companies, insurers, employers, and other businesses that use it to evaluate applications for credit, insurance, employment, accommodation, etc. That information is also used to establish your credit score.
Who Regulates These CRAs?
The federal government has legislation—the Fair Credit Reporting Act (FCRA)—that regulates how credit bureaus operate. Due to the fact that they handle sensitive information on millions of American citizens, they’re monitored by the Federal Trade Commission and the Office of the Comptroller of the Currency.
The bureaus have a legal responsibility to comply with the Fair Credit Reporting Act, and follow the law that protects the consumer.
What is a Credit Report?
A credit report is a record of your credit history compiled by the credit bureaus from a number of sources, including banks, insurance agencies, retailers, credit card companies, collections agencies and governments. These reports will reflect your payment history on all of your credit accounts you’ve had in the past, including your credit cards, student loans, mortgages, retail store credit cards, auto loans, telephone, and utilities.
Every time you apply for credit, your credit report will be reviewed, and the lender will base their decision to issue credit and at what interest rate, based largely on what is contained in the report. Having a good credit report means it will be easier for you to get loans at a great interest rate which translates into smaller monthly payments.
The credit bureaus don’t share information with each other. They also never bother verifying whether the information that they have on you is accurate or up-to-date so your credit reports can contain major discrepancies that could be potentially damaging to your credit history. This means, the onus of verifying that the information contained in your credit report is 100% accurate falls on you.
The credit bureaus are allowed to have negative items on the credit report only if it is 100% accurate and also verifiable. However, you are solely responsible for ensuring that the information contained in each of the credit reports is completely error free, because you can never be sure which one will be used whenever you apply for a new account.
Note that credit bureaus have no direct influence on whether you should be approved for a loan or not; that depends on the credit criteria of the lender requesting the information. However, by evaluating all of the information contained in your credit report (payment history, personal information, and credit habits) and FICO’s method of scoring that data, they do provide meaningful insights into your creditworthiness. This is why it’s so important to ensure that the information they are reporting is true and accurate.
How the Credit Bureaus Compile Information
The entire credit reporting system consists of three main players: you (the consumer), the credit bureaus and creditors (the companies who grant you credit). There are two major sources that the credit bureaus use to gather your credit information.
Subscribers are creditors, and are also known as information providers. These include auto lenders, insurance agencies, banks, credit card companies, retailers, jewellery stores, etc. Your creditors electronically send information about your credit behavior to at least one of the three national credit bureaus every 30 days. This information includes how much you owe, and whether you make your payments on time.
The information is stored and compiled into reports by the credit bureaus, and is used to calculate your credit score. This information is then sold back to these creditors at their request, when they are looking for potential clients for credit cards, loans and other types of finance related offers. The more information these credit bureaus can collect on each individual, the better off they’re going to be when making a decision to grant your application for credit.
Public records are freely accessible by anyone. These records include judgments, bankruptcies, tax liens, divorce settlements, satisfied judgments, satisfied liens, wage attachments and notices of default properties. These negative records have a severe impact on your credit report, so if you’ve had a court ruling that’s impacting your credit report it’s vitally important to make sure it’s removed if and when it has been satisfied.
The information contained in your credit report tends to include:
- Your personal details
- Current and previous addresses
- Credit card records
- Loan account records
- Tax liens
Industry experts suggest that you review your credit report on a periodic basis for the following reasons:
- The information it contains affects whether you can the loan you have applied for, and how much it will cost you to borrow the money.
- To make sure the information is accurate, complete, and up-to-date before you apply for a loan for a major purchase such as a house or car, buy insurance, or apply for a job.
- To help guard against identity theft. This occurs when someone uses your personal information to take out a loan or open a new credit card account in your name. Then, when they don’t pay the bills, the delinquent account is reported on your credit report. This could affect your ability to get credit, insurance, or even a job.