For many Americans applying for loans or credit from lending companies such as banks or retailers, creditworthiness plays a key role in determining the success of the application. Creditworthiness is usually determined by an applicant’s credit score, which is in turn dependent on several factors that point towards an applicant’s ability to pay back credit.
Lenders may rely on private companies called credit bureaus to obtain information about potential borrowers and determine if these borrowers will pay the credit back timely. A credit bureau collects data from a borrower’s credit history and summarizes it into a credit report that can enable lenders to make lending decisions. These lenders can then decide whether to lend credit in the form of credit cards or loans to potential borrowers, or even how much credit to lend them.
How Do Credit Bureaus Work?
In America, there are three major credit bureaus namely, Equifax, Experian, and TransUnion. By providing lenders with valuable information about potential borrowers, these bureaus have established a reputation upon which lenders can make important decisions about who to approve for credit. A credit bureau has access to borrowers’ relevant personal information, which many include names, addresses, and lists of credit accounts and their current standing.
However, the privacy of borrowers’ information collected by each credit bureau is protected under the Fair Credit Reporting Act (FCRA), which protects the privacy of this information. Hence, potential lenders can only access sensitive information such as a borrower’s credit history after the borrower has given the credit bureau permission to share this information.
While each credit bureau might operate by obtaining the information on the credit accounts that borrowers have opened with different lenders and then compiling it to generate a credit report, there are often differences with the credit scores one receives with each bureau. This could be due to any number of reasons, with one of them being that it is not mandatory for lenders to report information such as history of borrower payment to any credit bureau.
What Information Is Provided on a Credit Report?
The information on a credit report is collected from different lenders, who provide the credit bureau with a history of the borrower’s credit habits, which might include the following:
- History of payments made on each account
- Length of time each account has been open
- Accounts that have not been paid off and sent to collections
- Number of credit inquiries
While this is not an exhaustive list of information that can be found on a credit report, it goes to show that a borrower’s ability to pay back credit on time influences how any credit bureau will report on the borrower’s creditworthiness.
It is also important to know that each lender may report information to a given credit bureau with different levels of detail. Most lenders will share payment history that will include frequency of payments, amount paid for each monthly payment over the term of the loan or credit card account, and status of the account. Loan companies for auto or mortgage accounts may show much of the loan is left to pay off, while companies providing student loans may show the amount of debt in deferred payments.
Additionally, while retailers and banks can report information on payments made on incurred debts, medical billing companies might not report this information to any credit bureau, except in cases of missed payments. Similarly, personal loans obtained from family or close friends would probably not show up on a credit report.
One of the most significant pieces of information on credit reports is the history of missed payments and accounts currently in collection. This information has a huge impact on lowering the creditworthiness of a borrower in the eyes of potential lenders because it indicates that a borrower will not be able to pay back credit timely.
Learning How A Credit Bureau Works Can Help Improve Credit
Understanding how any credit bureau operates can work to a borrower’s advantage in managing credit. Most lenders will report information to a given credit bureau on a monthly basis. It is important to make necessary payments on all credit accounts on time to avoid having a lender report an account as past due or delinquent.
It also important to check credit reports for any inaccuracies or inconsistencies, which must then be reported to the credit bureau. Checking all three credit reports to ensure similarity between credit scores also helps in making sure that lenders are reporting accurate information.