What Are Credit Bureaus?

If you’re in the process of getting a loan, a mortgage, or making a big purchase, you might be wondering about your credit history and how your financial paper trail is gathered and put into the hands of your potential lenders. Your credit history is compiled at credit bureaus, among millions of other consumers. Credit bureaus then sell this information to lenders and other financial institutions who want to know your creditworthiness, borrowing behavior, and credit history.

How Credit Bureaus Work

There are hundreds of credit bureaus, but only three can lay claim as the major ones: TransUnion, Equifax, and Experian. While these bureaus go about their processes in different ways, the endgame is the same—gather and sell data.

Credit bureaus function as a database for raw data, but their business isn’t to determine whether or not you should get a loan. Bureaus let the lenders decide if you’d be a worthy borrower by selling them your credit profile, which is your recorded financial transactions—loans, leases, credit card accounts, bank accounts, and public records like bankruptcies, tax liens, and foreclosures.

Other credit reporting bureaus aside, the big three are:

Comprehensive Loss Underwriting Exchange (C.L.U.E.): a bureau specializing in obtaining insurance information and creating consumer auto and personal property reports.

ChexSystems: focuses on gathering your data on any closed checking and savings accounts.

National Consumer Telecom and Utilities Exchange: gathers consumer telecommunication and utility information.

Although credit bureaus don’t decide on your loan approval with your lender, they do have an impact on your credit standing.

What Information Bureaus Collect & Where They Source It

It sounds suspicious—multiple credit bureaus collecting your personal financial information. Once you dive into what credit bureaus are looking at in terms of your financial footprint, it makes more sense.

Personal information: bureaus will provide lenders with your contact and personal information like your name, address, Social Security number, and date of birth. They’ll also provide lenders with your employment history and any addresses previously associated with you.

Public information: this information refers to any declared bankruptcies, tax liens, evictions, wage garnishments, or foreclosures that are public records. Bureaus collect this information from the court system, but only if it’s relative to your finances.

Trade lines: credit reporting companies go into detail for this category, which are the records of your loans and lines of credit. They’ll detail the type of loan, the creditor, its dates, balances, status, date of last activity, past due amounts, minimum payment due, amount of your last payment, and your liability on the account. There’s so much detail here because this is the pertinent information lenders are looking for to base their decision as to whether or not to approve your loan.

Inquiries: lastly, anytime a party asks about your credit, the inquiry stays on your credit history record. These inquiries stay on your report for two years. Inquiries can lower your credit score by a few points, but not for very long.

Credit bureaus receive your information from a variety of sources, as you can see. They get your financial data from other lenders you’ve dealt with, your public records, your utility bills, and other sources.

FICO, Credit Score, and Credit Bureaus

Credit bureaus are also responsible for your credit score, a handy number that lets you know how good your borrowing and repayment practices are and what you look like to potential lenders.

Credit bureaus collect the data of millions of consumers and translate each credit history into a unique credit score, with the help of the standardized credit scoring model designed by the Fair Isaac Corporation (FICO). Fair Isaac examines your credit report and uses a proprietary formula to create your score based on the information it is provided. Thus, your credit score is commonly referred to as your FICO score.

What impacts your score is broken down into a few different categories:

• Payment history (35%)
• Amount yet owed (30%)
• Length of credit (15%)
• Type of credit (10%)
• New credit (10%)

Part of the data gathered by the credit bureaus is your payment history, which makes up the bulk percentage of how FICO determines your score. Your payment history is a basic record of how you pay your bills. Do you pay them on time or are you late? It’s a simple record but immensely important to your overall creditworthiness.

Every time you’re late in paying a bill, your score can be affected negatively. The more past due you are in paying a bill, the worse it impacts your score, so being two months past due is much more devastating to your credit history and FICO score than being a month past due. Keep your FICO score up by paying your bills on time, eliminating your past dues, and if something does come up where you can’t make your payment, notify your lender immediately.

The amount owed category examines your credit card debt and the percentage of available credit you have. Here’s a formula to help guide you to a healthy amount on your credit cards: divide the amount of all of your combined balances that you owe across your accounts by the total amount of your combined credit limits. Aim to keep this percentage as low as possible, to 30% or less.

Other categories complied by your credit history that create your credit score are your length of credit—the longer, the better—new credit, and the types of credit you have. Applying for multiple loans or credit cards in a short period of time can negatively impact your score as lenders view this move as risky. Lenders also prefer to see a variety of credit types because it shows you’re an experienced borrower and not new to the game.

Varying Credit Scores and Inaccurate Report Information

Creditors aren’t required to report your information to the credit reporting bureaus, which is why your credit scores might look different depending on what bureau you get it from. Information could be outdated or incomplete, and that can vary your credit scores significantly.

If this happens to you, you have the right to dispute inaccurate information per the Fair Credit Reporting Act, where the credit bureau must perform a free investigation. Credit bureaus are required to provide you a copy of your credit report if they make one. You can also get a free copy of your report every 12 months or an additional report for a small fee, which usually costs about $12.

How Long Does Information Stay on Credit Reports?

The credit reports will hold any negative financial information like foreclosures or late payments for seven years. The length of time for some negative information can vary state-to-state, and a claim like bankruptcy can vary, too, depending on what chapter of bankruptcy was filed. For example, Chapter 7 bankruptcies can hang onto your report for ten years but are discharged. Chapter 13 bankruptcies can be removed after seven years. The good news is that positive information will remain on your credit reports indefinitely.

Check Your Free Credit Reports

Credit bureaus must give you a copy of your report if they have one, so use this opportunity to take a look at your financial footprint. Make sure nothing jumps out as incorrect or lacking because these are reports that your potential lenders will see to determine your creditworthiness and loan approval. Remember, you can dispute inaccurate information, and fortunately, the process has become streamlined with online tools.