To determine whether a credit applicant is a good or bad credit risk, lenders rely on the data produced by credit reporting agencies, alternatively referred to as credit bureaus. These boast voluminous databases of consumer credit records on millions of Americans and offer lending institutions an in-depth look at a prospective borrower’s credit history. The three leading credit reporting agencies- TransUnion, Experian, and Equifax- as well as numerous smaller, local credit bureaus furnish risk-management credit services and credit reports to their clientele. Credit bureaus gather information about consumers and their credit histories from public records such as court records (i.e. foreclosure, bankruptcy), creditors such as mortgage companies, credit unions, banks, and credit card companies, as well as retailers and other reliable sources.
Thousands of creditors regularly supply information about their customers’ credit usage and payment history to each of the credit bureaus, which then incorporate it into the credit report. Creditor contacts, inquiries, account histories, public records, and consumer data are utilized by credit reporting agencies to create credit reports. These records typically features information such as 1) whether borrowers have paid their bills in a timely manner, 2) how long their accounts have been open, 3) what forms of credit they use, 4) how much credit they have used, 5) how borrowers pay their bills, and 6) whether they have filed for bankruptcy or been sued or arrested.
Credit reporting agencies determine a borrower’s credit rating on the basis of information contained in the credit report. Most credit bureaus employ a variation of what is known as the FICO score, which is calculated by considering factors such as the applicant’s payment history, new credit, length of his or her credit history, and balance due. To improve and simplify the credit procedure for lenders and consumers, the big three recently introduced a scoring system called the Vantage score. The new streamlined methodology aims at ensuring objectivity, predictability, and consistency in credit scoring among the three credit reporting agencies. The sole variance in the credit score depends on the information in the credit report.
After compiling information about consumers and their credit history, the agencies place the reports at the disposal of employers as permitted by law, insurance companies, landlords, credit card companies, banks, and other prospective and current lenders. Credit bureaus disclose credit scores and credit reports when a hard or soft inquiry or request is made. A soft inquiry is one made by employers or consumers. A hard inquiry, on the other hand, is set in motion by rental applications to landlords or is put forward by creditors such as mortgage lenders and credit card companies. Whenever a prospective borrower applies for credit, the lending institution contacts one or several of the credit reporting agencies for purposes of verifying applicants’ credit score and report. To aid them in deciding whether or not to extend credit and at which interest rate, lenders purchase credit reports on their clients and applicants from the credit bureaus and review the credit history reported by the latter.
The top three credit reporting agencies are independent of one another and utilize distinct approaches when collecting and managing information. Credit reports from TransUnion, Experian, and Equifax generally differ in content, with one study showing as much as a 40-point disparity between them. Consequently, it is recommended that consumers access information and their credit report from each of the major credit bureaus in order to obtain a comprehensive overview of their credit history. Pursuant to the Fair Credit Reporting Act, one free credit report from each of the major credit bureaus must be made available once every 12 months to consumers requesting one. The Act also requires credit reporting agencies to investigate within 30 days any items brought to their attention by consumers. If the credit report is incomplete or inaccurate, the credit bureau must fill in the gaps or correct it, respectively. Upon completing the investigation, the credit reporting agency must furnish the written results to the consumer and offer him or her a free copy of the report if an amendment is made. At the consumer’s request, it is required to notify recipients of the report within the last six months of any corrections made to the record.
Some credit bureaus also provide credit monitoring, a paid service that prevents identity theft. Consumers are informed of any changes or inquiries to their credit report, and suspicious activity is reported.