The three credit bureaus are part of our financial lives and perform important roles. Learn how these reporting agencies operate so you can better navigate your financial literacy.
Credit bureaus, also known as credit reporting agencies, perform an important role in today’s world. Their primary function is to help lenders make objective and accurate decisions about prospective customers.
To that end, these independent, for-profit companies collect peoples’ credit and debt activity, then create reports that financial institutions and other businesses can access. Because the credit reports change as the data is updated, businesses gain valuable insight into a person’s past and evolving account management habits.
Here’s how credit reporting bureaus work – both for you and for the companies that depend on them.
The 3 national credit bureaus and how they operate
What a credit bureau does
Although there are a number of credit bureaus in the United States, the big three are Experian, TransUnion and Equifax. While each bureau essentially does the same thing, they are in competition with one another and thus have their own set of unique products and services.
The most popular and well-known product the credit reporting bureaus offer is the consumer credit report, which is a record of how a consumer has been managing their credit accounts and financial obligations. Credit reporting bureaus are required by law – the Fair Credit Reporting Act – to make sure the information on the reports is both correct and timely.
However, credit reports for consumers and financial institutions differ. “Individuals get theirs and lenders get theirs, and the two are very different,” says Yosef Brailofsky, a partner in Goldminecredit.com, a credit education company based in Spring Valley, New York. The one you pull as a consumer is a condensed and simplified version of your report. The report businesses have access to is longer and more complicated.
Who gets the credit reports?
Credit reports are available upon request. When you apply for a loan, line of credit, credit card or tenancy, you authorize that company to check your credit. Once done, a hard inquiry will be placed on your credit report, which is an indication that you have actively applied.
Businesses with a legitimate purpose can obtain your credit reports without your permission. It helps them identify which people they should focus their marketing attention on. That’s why you get preapproved offers of credit – they’ve already checked you out. These types of credit pulls show up as soft inquiries on your credit report because you did not instigate the credit check.
Of course, as a consumer, you can request your own credit reports, which also show up as a soft inquiry or soft pull. In fact, it’s not only your right but your responsibility to check your reports. “Consumers should actively engage with their credit and follow their reports to know what’s happening,” says Brailofsky. “For many things in life, you have to have good credit, so you need to know what is being reported about you.”
Consumer credit reports are available via AnnualCreditReport.com and you can obtain one report per bureau every year – for free. You may also order them directly from the credit bureaus, though there is usually a fee unless the bureau offers a special promotion.
See related: Prequalified vs. preapproved: What’s the difference?
What the credit bureaus can and can’t report about you
When you obtain your credit report, you’ll notice that it’s broken down into four distinct sections.
This shows your personal information, such as your name, address, Social Security number and date of birth. “Credit reports will also include current and prior employer information,” says, Simon Goldenberg, Esq., a credit lawyer from Brooklyn, New York. “Your income, though, won’t be on there.”
Nor can your report indicate other personal details, says Goldenberg, such as your race, religion or anything else that can be discriminatory.
Hard and soft inquiries are listed and will stay on your report for up to two years. The consumer version of the report will show both, but the version businesses receive only shows hard inquiries.
This area will show active and inactive credit accounts – such as credit cards, lines of credit, mortgages, vehicle loans, student loans, personal loans and collection accounts. Detailed information about each will be reported, including:
- Account type
- Partial account number
- Date opened and closed
- Original loan amount or credit limit
- Date of last activity
- Current balance
- Payment patterns, including delinquencies and charge-offs
Lenders aren’t required to furnish information to all three (or even any) credit reporting bureaus, though most do. Accounts that were paid as agreed and closed are usually reported for ten years from the date of last activity.
Positive information for open accounts can remain indefinitely and negative information doesn’t stay on your report forever. Late payments, charge-offs and collection accounts can only remain on your reports for seven years.
You can also add positive data to your credit report. For example, Experian has its Experian Boost program, which allows you to add phone and utility payment histories to your Experian credit report.
See related: Busted: 5 myths about alternative credit data
A notice that you filed for bankruptcy can appear – but only for a limited time. Chapter 7 bankruptcies are deleted from your report 10 years from the filing date. Chapter 13 bankruptcies are deleted seven years from the filing date.
Some items that used to be a matter of public record on a credit report now aren’t. Policy changes, as per the National Consumer Assistance Plan, were developed to improve the credit reporting system. As of 2018, tax liens and civil judgments are no longer listed on credit reports.
Why credit scores differ among the bureaus
While credit reports and credit scores are often referred to synonymously, they are separate products. A credit report is a written document that details your credit history, but a credit score is a numerical expression of the relevant data that’s on the report.
Credit scorers take information that appears on a credit report and input it into proprietary mathematical models, turning it into a numerical score that helps a lender predict credit risk. Your scores will fluctuate as your credit history is updated. Keep in mind that your credit information may not be reported to all three credit bureaus.
Since the data is supplied by lenders, collection agencies and court records, each bureau might have different information. Lenders also report credit information at different times, which often results in one agency having more up-to-date information than the other.
Additionally, while most creditors furnish information to all three of the major bureaus, third-party collection agencies are often the exception. “Collectors often choose to report to one bureau over the other,” says Brailofsky, “So you should get your reports from all three to know for sure.”
The two most common credit-scoring companies are the Fair Isaac Corporation (FICO Score) and VantageScore. The scores range from around 300 to 850. While both scorers use the same data, their calculation methods are different.
FICO scores weigh the following as most to least important, as expressed in percentages:
- Payment history: 35%
- Credit utilization: 30%
- Length of credit history: 15%
- Credit mix: 10%
- New credit: 10%
VantageScores are based on what it considers most and least influential:
- Payment history: extremely influential
- Age and type of credit: highly influential
- Percentage of credit limit used: highly influential
- Total balances and debt: moderately influential
- Recent credit behavior and inquiries: less influential
- Available credit: less influential
This is why, depending on the bureau and credit scoring company used, your credit information can vary. However, if your credit report shows a number of well-managed accounts that you’ve had for years, a low debt-to-credit-limit ratio, no bankruptcies and few hard inquiries, not only will your credit report be attractive, but you’ll also have high scores.
Common myths about credit reporting
Tall tales about credit reporting bureaus get passed along, so it’s important to know the truth.
|It’s hard, if not impossible, to remove inaccuracies or data that’s too old.||Each credit reporting bureau has an online dispute form that’s easy to use.|
|You can’t be sued for a debt that has dropped off your credit report.||Your state’s statute of limitations determines the number of years a creditor has to sue you, says Goldenberg. And in some states, it may be far longer than seven years.|
|To develop a good credit report, you need to be in credit card debt.||Using credit cards is the fastest way to build good credit, but it’s best to pay your balance in full every month.|
|You can remove information from a credit report if you don’t like it.||“Wrong,” says Goldenberg. “If the information is true and timely, it stays on your report until it ages off naturally. Or if you update or delete it as a result of a dispute.”|
|Credit reports are biased.||“Information on a report is factual, and it’s not reported in a different way depending on the person,” says Goldenberg. “Can creditors make their own assumptions based on what they see on the report? Yes. Your reports say something about you.”|
|Your credit report will be perfect as long as you make your minimum payments on time.||If you’ve used too much of your credit line, your credit report and scores will be negatively impacted – even if you never miss a due date.|
|Having no credit report is just as bad as having a damaged credit report.||It’s simpler to start a positive credit history than it is to delete high debt and wait for late payments, charge-offs and collection accounts to be removed.|
Being knowledgeable about the business of credit reporting will make you more comfortable with the system. In the end, you control what is reported about you by borrowing and repaying productively – and by checking your reports frequently so you can make any necessary changes.
See related: The definitive guide to debunking credit score myths