What Does a Credit Bureau Do and Why?

Experian, TransUnion, and Equifax — these are the names of the three largest credit bureaus in the United States (aka the “Big 3”). If you’ve heard of them before, you may already have a basic idea of what a credit bureau does.

This article is meant to give you a better idea about the main role of the credit reporting agencies and the information they use.

What is a credit bureau?

A credit bureau, also called a credit reporting agency, is a company that collects information about how you manage your credit and finances. The credit bureau then puts the data into an easy-to-read report - a credit report. It sells your report to others who have permission to view your credit information under federal law.

Credit reporting is big business. Each major credit reporting agency maintains data on some 220 million Americans.

Your data and your permission

The credit bureaus collect information about you and how you manage many of your financial obligations. Believe it or not, they don’t need your permission to collect this data. Some of the data that is collected is your credit history and the timing of your payments, among others.

The credit bureaus develop relationships with the people you owe money to, like creditors, banks, lending institutions, credit card companies and collection agencies. These companies may voluntarily choose to share their data with the credit bureaus so the bureaus can include it in consumer credit reports. A company that shares information with a credit bureau is known as a data furnisher.

Sometimes the credit bureaus seek information to add to your credit reports on their own. This is true in the case of bankruptcies.

Courthouses aren’t data furnishers and don’t supply information to the credit bureaus. But anyone can access public records. The credit bureaus may use services like PACER (Public Access to Court Electronic Records) to find certain public records and include them in your credit file.

Types of information the credit bureaus collect about you

Credit bureaus collect information that: (a) identifies you and (b) offers insight into how you manage certain financial obligations.

As a result, you won’t find information on a credit report like your criminal record, level of education, or medical history — just to name a few examples.

Instead, you might find information on your credit report such as the following.

• Personal Identifying Information: Your name, addresses, Social Security number, date of birth, and employers. This is often also called PII.
• Accounts: The name and account number of your current and closed credit obligations (loans, credit cards, lines of credit, etc.). Each account may also feature your payment history, current balance, original balance, historical highest balance, past due balance, credit limit, date opened, and more.
• Collections: May include unpaid debts that have been sold or are being managed by third-party debt collectors.
• Bankruptcies
• Inquiries: Records of anytime the credit bureaus gave someone access to your credit information in the last two years, such as when you applied for a new credit card or loan accounts or checked your own report.

Rules the credit bureaus have to follow

As mentioned, the credit bureaus don’t need your permission to collect your data or view your credit account. But that doesn’t mean they can do whatever they please with the information they collect about consumers. There are strict guidelines the credit bureaus must follow.

The Fair Credit Reporting Act (FCRA) is the primary law that regulates the credit bureaus. It tells them what they can and cannot do as they collect, compile, and sell your credit information. The law is designed to protect you from unfair credit reporting practices.

Here are a few examples of FCRA rules that the credit bureaus have to follow.

Consumers have the right to dispute information on their credit reports that they think is wrong.

A credit bureau must investigate your dispute within 30 days (sometimes 45 days) and delete the item from your report if the data furnisher doesn’t verify that it’s accurate. See more about fixing errors on your credit report.

A credit reporting company can only share your information with someone who has a “permissible purpose” to access it.

People can’t just buy a copy of your credit report because they feel like checking up on you. Those with a valid reason to view your credit reports may include lending institutions, an existing creditor, collection agencies, landlords, employers (with your written permission), and you.

Most negative information on a credit report has an expiration date.

Most negative items can stay on a credit report for up to seven years. Bankruptcies may remain on your report for up to 10 years.

Consumers can opt out of prescreened offers.

Don’t want the credit bureaus to sell your information to companies who use it to market credit and insurance services? You can visit OptOutPrescreen.com to remove yourself from these lists.

Consumer reporting agencies must give you access to a free copy of your report once every 12 months.

Access copies of your free credit report from Experian, TransUnion, and Equifax at AnnualCreditReport.com.

Credit report vs. credit score

A credit report is primarily a record of your credit management history with a few other details thrown in. It contains the types of information listed above (e.g., payment history, balances, limits, inquiries for new credit, etc.).

Lenders review your reports to see how you’ve handled the money you borrowed in the past, and how you’re managing your current debts. Learn how to read a credit report.

A credit score isn’t part of your credit report. It’s an add-on product. A credit scoring model assigns you a number based on how successfully you’ve managed financial obligations (at least the ones that appear on your reports).

For example, a credit scoring model might look at your credit report and ask, “Are there any late payments?” Another question it might ask is, “What’s the credit utilization ratio on credit cards?” Your credit score may consider other factors too, like how often you apply for new credit and the average age of accounts on your report.

Ultimately, your credit score helps companies predict the risk of doing business with you. FICO and VantageScore (the two most common brands) feature a credit score range of 300–850. The higher your number climbs on the scale, the less likely you are to default on a credit obligation (i.e., become 90 or more days late) within the next 24 months.

If you have an average credit score, you may be able to qualify for credit cards and loans, though you may not qualify for the best rates and each lender has their own requirements.

A deeper look at the process

Credit scores are calculated by running your credit report through a complicated software program known as a scoring model. The software is downloaded at each major credit bureau.

If a lender wants to purchase a copy of your TransUnion credit report and a FICO Score based on that information, it pays a fee to TransUnion for both products. TransUnion, in turn, pays FICO a royalty when it sells a credit score calculated using FICO’s software.

It’s also worth noting that your three credit reports may yield three completely different credit scores. One reason this can occur is because each credit bureau creates its own reports. They don’t share information.

All three of your credit reports are likely to be similar. Yet, your credit report with Equifax might contain slightly different information than your report from Experian and so on.

Do the credit bureaus determine whether or not you get a loan?

Lenders rely on the information they purchase from credit bureaus, like credit reports and scores. They use the credit information to predict risk and, hopefully, avoid loaning money to borrowers who won’t pay it back as promised. It’s about maximizing profits. So, if you’re looking to apply for a credit card or loan, having a solid credit score will put you in the best position for approval.

However, the credit bureaus themselves only sell the data. The individual lender decides what to do with it. If someone has a history of not paying his bills on time, one lender might choose to deny his application. The next lender might approve the application, but charge a higher interest rate and ask for a bigger down payment.

What you’ll notice is that in neither example above did a credit bureau weigh in with its opinion. Smith’s Bank wouldn’t ask Experian whether it should approve someone for a new loan. The bank, not the credit bureau, is loaning the money. It’s 100% up to the lender to make the call when you apply for new financing.

Other consumer reporting agencies

Any company that collects or evaluates information about consumers and sells it to others is known as a consumer reporting agency. This definition certainly applies to the three major credit bureaus. However, Experian, TransUnion, and Equifax aren’t the only ones in the business of big data.

The Consumer Financial Protection Bureau keeps a list of consumer reporting agencies you can access online. Below are a few well-known names on this list and some (though not all) of the products they sell.

• ChexSystems: Sells reports to financial institutions, like banks and credit unions. A consumer report with ChexSystems could affect your ability to open a new checking account.
• LexisNexis Risk Solutions: Provides reports to lenders with information the Big 3 credit bureaus don’t collect. For example, some mortgage lenders may use the LexisNexis Liens & Judgements Report to search for public record data that’s no longer in traditional credit reports.
• C.L.U.E. Inc: Sells reports to insurance providers. These reports could impact the cost of your home and auto insurance premiums. (C.L.U.E. Inc. has an affiliation with LexisNexis Risk Solutions.)
• IntelliCorp: Provides background checks for employers that may include information like worker’s compensation claims, arrest records, and criminal records.
• CoreLogic Rental Property Solutions: Supplies tenant screening reports to landlords. These reports may include any history of evictions and a background check.

All reports created and sold by consumer reporting agencies fall under the Fair Credit Reporting Act. The FCRA states that you have the right to request a free report from any consumer reporting agency once every 12 months.

Knowledge is power

Good credit is a valuable asset. It can make many areas of your life easier and more affordable. Good credit can often help you get into a loan with a lower interest rate and less money down.

If you don’t have good credit or any credit history at all, it may be wise to start with a secured credit card or sign up for a credit builder loan. This is a great way to learn how to build credit fast if you are just getting started.

For example, the myFICO Loan Savings Calculator estimates that the average APR on a 60-month new auto loan is around 16.7% if your FICO Score is 580. But, if your FICO Score improves to 690, you might qualify for an APR around 5.7% for the same loan. On a $30,000 auto loan, that 690 score might save you $165 per month and $9,881 in total interest.

Your credit information can impact your financial life in significant ways. It’s wise to learn everything you can about both the credit bureaus and the credit reporting and scoring process in general, as well as check your annual credit report to keep yourself on track.

About the author

Michelle L. Black is a leading credit expert with over 17 years of experience in the credit industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting and debt eradication.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.