What Are Credit Bureaus and How Do They Work?

What Are Credit Bureaus and How Do They Work? article image.

Through April 20, 2022, Experian, TransUnion and Equifax will offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com to help you protect your financial health during the sudden and unprecedented hardship caused by COVID-19.

If the names TransUnion, Equifax or Experian ring a bell, you may already know a little bit about credit bureaus. They're the large companies that collect and store information about consumers' financial lives and use this information to create credit reports.

Credit bureaus, also known as credit reporting agencies or consumer reporting companies, play an integral part in the financial lives of millions of people. While the bureaus don't actually make lending decisions, they sell credit reports and credit scores to banks, mortgage lenders, credit card issuers and other types of creditors.

These creditors typically consider your credit reports and scores as part of the review process before approving your loan or credit card application.

Creditors generally have to purchase consumer credit reports when they're making a lending decision, but consumers can get free copies of their own credit reports at any time.

The Three Major Consumer Credit Bureaus

The three major consumer credit bureaus are TransUnion, Equifax and Experian, the publisher of this article. Creditors, like banks and credit card companies, use these bureaus' consumer credit reports to help them determine the risk involved in lending money to regular people like you.

In other words, when you apply for a mortgage, personal loan, student loan, auto loan, line of credit or credit card, the lender may base its decision to approve or reject your application on your credit reports from the major consumer credit bureaus.

There are also all sorts of specialty credit reporting agencies. Some focus on information that landlords want to know, such as whether you've ever been evicted, while other bureaus track and report consumers' insurance claims. The Consumer Financial Protection Bureau (CFPB) maintains a list of credit reporting agencies with details on how you can request a free copy of your credit report from each company.

Back to the big three. While they often get lumped together, it's important to remember that they are separate, for-profit companies. The big three compete to create the largest and most accurate databases of consumer information and sell credit reports among other products. As a result, your credit reports from the three bureaus often aren't identical.

How Do Credit Bureaus Get Information?

If you've gotten a loan or credit card from a major issuer within the past seven years, there's a good chance your information is in at least one of the major bureaus' databases. Most of the credit bureaus' information comes from other companies. In the credit world, these companies are called data furnishers. In everyday terms, they're the same financial institutions that you regularly interact with, including banks, credit unions, credit card issuers, collection agencies and loan servicers.

These data furnishers send information about their customers' accounts, such as their current balances and whether their bill was paid on time, to the credit bureaus at least once every month. They aren't required to send information to the credit bureaus—it's all voluntary. In fact, it costs money to maintain the staff and systems that allow companies to report to the bureaus.

However, the creditors also benefit from reporting. After all, borrowers may be more likely to make payments on time if they know a late payment will get reported to the credit bureaus and possibly hurt their credit scores.

Credit bureaus collect public records information, such as bankruptcy filings, and add these to consumers' credit reports. Some types of public records, such as tax liens and civil judgments, are no longer collected by the bureaus. Everything else on your credit report is there because a data furnisher reported the information to a bureau.

The bureaus don't just add anything to your report, though. As an example, Experian won't include anything related to a consumer's income, race, religion, personal lifestyle, political preference, friends or criminal record.

Who Uses Credit Reports?

The same creditors that send information to the credit bureaus often purchase credit reports and credit scores from the bureaus.

They use credit reports and scores to help determine whether to approve or deny an application and the interest rates on loans and credit cards they approve. Credit reports and scores can help creditors determine the likelihood that someone can repay a loan, and by extension the risk associated with lending the person money. Riskier borrowers (in other words, those with lower credit scores) get charged a higher interest rate because there's a greater chance they won't repay the entire loan or make regular credit card payments.

Additionally, creditors regularly purchase credit reports and scores for their current customers. They may decide to close your account, or raise or lower your credit limit, based on changes in your credit report.

The credit bureaus also sell credit reports to landlords, marketing companies and employers, but these reports don't include as much information as the reports that creditors receive. For example, the credit report an employer receives won't have your account numbers on it.

The Fair Credit Reporting Act Regulates Credit Bureaus

Federal and state laws govern what can and cannot appear in your credit reports and who can request a copy of your credit report.

The Fair Credit Reporting Act (FCRA), which was passed in 1970 and has been amended several times, is one of the most important federal credit reporting laws. Some of its major rules include:

  • Consumers can request a free copy of their credit report from each credit bureau once every 12 months.
  • Negative information, such as late payments, generally must be removed from credit reports after seven years, although certain bankruptcies can remain for 10 years.
  • A person or company must have a "permissible purpose" to request a copy of a consumer's credit report. These include the consumer's permission or to make a lending decision after receiving an application.
  • Consumers have the right to dispute information in their credit reports. The credit bureau must investigate non-frivolous disputes and verify, correct or delete the disputed information.

The FCRA applies to all consumer reporting agencies, not just the big three.

Why Do I Have Different Credit Scores for Each Bureau?

You may find out you have several credit scores when you check your credit. Don't worry, having several different credit scores is completely normal.

Credit scoring companies like FICO and VantageScore develop scoring models that analyze one of your credit reports from the major bureaus and spit out an easy-to-understand score. The credit bureaus also create credit scores based on their own credit reports.

These credit scores are generally designed to predict the likelihood that a person will fall 90 or more days behind on a payment. A higher score indicates a person is less likely to fall behind on a bill and is, therefore, more creditworthy. Creditors tend to offer the best rates and terms to people who have high credit scores.

Your credit scores could be different if your credit reports aren't identical or if you're comparing scores from two different models. Both scenarios are quite common.

Credit bureaus are required by law to share certain types of information. For example, you can add a fraud alert to your credit report if you think you've been the victim of identity theft, and creditors must then take extra steps to verify your identity before getting a copy of your credit report. The initial bureau must pass on your fraud alert request to the other two bureaus. However, the bureaus are competitors and don't share most of the information that's in their databases. As a result, there are often differences between your credit reports from TransUnion, Equifax and Experian.

There are also hundreds (if not more) of different credit scoring models. So, even if your three credit reports are identical, you could have different scores depending on which models are being used to do the calculations.

Get Your Credit Report for Free

The FCRA guarantees you one free credit report from each bureau every 12 months, which you can request online at AnnualCreditReport.com. Additionally, you can check your Experian credit report for free once every thirty days by signing up for an account on Experian.com.

Want to instantly increase your credit score? Experian Boost helps by giving you credit for the utility and mobile phone bills you're already paying. Until now, those payments did not positively impact your score.

This service is completely free and can boost your credit scores fast by using your own positive payment history. It can also help those with poor or limited credit situations. Other services such as credit repair may cost you up to thousands and only help remove inaccuracies from your credit report.

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To submit a dispute online visit Experian's Dispute Center. If you have a current copy of your personal credit report, simply enter the report number where indicated, and follow the instructions provided. If you do not have a current personal report, Experian will provide a free copy when you submit the information requested. Additionally, you may obtain a free copy of your report once a week through April 2022 at AnnualCreditReport.