What Are Credit Bureaus?
Credit bureaus are financial companies that maintain active databases of every credit customer in the US and in many foreign countries too.
In the United States, they are regulated by the Federal Trade Commission.
The three main credit bureaus are the first destination lenders typically go for information on a prospective borrower.
Whenever you apply for a credit card, loan, mortgage or any other type of credit, your credit provider will check your credit with one or more of the major bureaus.
The information held by credit bureaus can have a major impact on your chances of approval for new credit - and it also affects your APRs and payment terms.
Let’s find out more about these organizations that play such a vital role in the financial lives of almost every American.
Why Were They Started?
Credit bureaus have an interesting history that goes back to the tailor shops of London in the 1800s.
When certain gentlemen made a habit of having suits made and failing to pay their bills, tailors started to share a list of blacklisted names in order to prevent financial losses.
- In 1826, the Manchester Guardian Society was founded - this would later become Experian.
- America’s first credit bureau was the Mercantile Agency, founded in 1864 in New York.
- Equifax was founded in 1899 and remains one of the world’s biggest agencies with over 1 billion consumers within its database.
Almost 200 years after the first credit bureaus were founded, their purpose remains the same: to provide lenders with information on borrowers and help them avoid unpaid bills and defaults.
What Kind Of Information And Data Do They Collect?
Credit bureaus collect a variety of information from loan companies, credit card companies, banks and other institutions.
Here are some of the key types of information they compile.
- The total amount of credit you have available
- The amount of your available credit that you’ve used (known as credit utilization)
- Your record of paying installments
- Debts in arrears and under collection
- Bankruptcies, foreclosures, repossessions, tax evasion and fraud
Every consumer’s credit profile is like a snapshot of their current credit use and a history of their payment habits and financial conduct.
The information that credit bureaus record about you has a very big impact on your chances of being approved for a loan, credit card, or even a job that involves financial management.
How Do They Factor This Data Into Your Credit Score?
Your FICO credit score is calculated by the Fair Isaac Corporation, using information provided by the major credit bureaus.
VantageScore by TransUnion is an alternative score used by some credit providers. Both scores range from 300 to 850.
The following is a breakdown of the different factors that go into calculating your score, but it is important to recognize that these are estimates and not absolute figures.
Criteria here include skipped payments, delinquent accounts, and positives like on-time payments.
This counts 35% toward your score.
This is measured using credit utilization (the percentage of your available credit that you’re currently using).
It makes up 30% of your score
The amount of time your credit accounts have been open is important.
This counts for 15% of your score.
Your credit mix
The different types of credit you use and any new credit that you’ve recently applied for are also relevant, each accounting for 10% of your final score.
It’s clear that your payment history is the most important factor influencing your credit score.
The reason for this is simple: a customer who has paid their debts reliably in the past is likely to keep on doing so.
The amount owed indicates how much you rely on credit to cover your monthly expenses and is the second-biggest factor in your credit score.
Ideally, you should aim to keep this figure below 30%, or $3,000 for a credit limit of $10,000.
Your credit history, credit mix, and new credit applications make up the final 35% of your score collectively.
It’s always good to keep your credit accounts open, maintain a mix of credit cards and loans, and not apply for too many credit products at any given time.
Why Do Scores Vary Between Credit Bureaus?
Have you ever checked your credit score with more than one bureau and noticed that the results vary? There are several reasons for this.
- Credit bureaus sometimes use different information sources. One bureau may have received positive or negative credit information about you from a lender while the other did not.
- Credit bureaus calculate credit scores differently. For example, Equifax assigns more importance to credit history than TransUnion does.
- They may use different types of credit scores: either your FICO score, VantageScore, or an average of the two.
It’s normal to find a small difference in your credit score between different credit bureaus. However, if the difference is large - more than 25 points or so - you’ll want to check your credit reports for errors.
How Do You Work With A Credit Bureau To Fix An Error?
Every consumer in the US is entitled to a free credit report each year from each of the three main bureaus.
You can request yours by visiting AnnualCreditReport.com.
Evaluate each report and keep an eye out for the following errors that can needlessly lower your score:
- Errors in your personal details
- Bills listed as unpaid that have actually been paid
- Incorrect credit account balances
- Credit accounts listed twice by mistake
- If you are divorced, your ex-spouse’s credit accounts
- Credit accounts that you closed that are listed as “closed by grantor”
If you spot these errors or anything else that looks suspicious, let the credit bureau know right away.
You can file a dispute online or by calling the relevant bureau.
What Are Tools And Tricks To Improve Reporting Frequency To Credit Bureaus?
Your credit score will always improve if your credit providers report your positive payment history and low credit utilization to the major bureaus.
Unfortunately, some credit providers don’t report this information to all three bureaus - and they may only report on a quarterly basis in some cases.
- You can’t force your credit provider to report to the credit bureau of your choice, but you can ask them if they do - and if so, when.
- Once you know the reporting date - in the case of a credit card - you’ll want to ensure that your credit balance is low on and around that date.
- It’s a good idea to make an extra payment before the reporting date to bring your credit utilization down to 30% or less.
A well-managed credit account will improve your credit score over time.
Timely payments, low credit usage, and not applying for multiple loans or credit cards at once can all boost your score.
Credit bureaus are important players in the financial industry.
The information they record and report can have a big impact on your credit score.
Knowing how the credit bureaus work is a great first step toward improving your score.
Keeping your credit utilization low, checking your credit reports often for errors, and maintaining a solid payment history are essential steps you can take towards increasing your FICO score and creditworthiness over time.