Unraveling the mystery of credit bureaus
By Dawn Papandrea
November 5, 2014
When you apply for a car loan, a mortgage, a new place to rent, even for insurance, chances are the lender, landlord or insurance company will check your credit report.
What these organizations find in that report will decide what interest rate you will get, whether you are worthy of that swanky apartment or how much you will pay for insurance.
So, a lot is riding on those deeply personal pieces of information. But, who gathers the intel, and what are your rights?
Here's the scoop on the august credit bureaus that collect, store and give out information that can be the deciding factor into where you'll live or how much you'll pay.
Who are the credit bureaus?
Equifax, Experian and TransUnion are the three major credit bureaus in the United States. Equifax is the oldest of the three, established in 1899, followed by TransUnion in 1968, and Experian in 1980.
Today, they each collect information on consumers from data furnishers such as banks, credit issuers and retailers, says Meredith Griffanti, spokesperson for Equifax. Or another way to think of it — the agencies are like libraries. “Clients can check out information as long as they have a permissible purpose under the law,” says Genevieve Julliard, president of Experian's Consumer Information Services.
Clients can include creditors, lenders, banks,or anyone who needs to assess your risk in order to offer you a line of credit, or modify the credit account you already have. Credit bureaus essentially make money by selling data to clients to help them make credit decisions. The bureaus also sell consumer information to marketers (which is how you get all of those pre-approved credit offers in the mail), as well as by credit monitoring services.
After consumers pay a lender, the lender updates its records and shares the payment status with the credit reporting agencies. The data collected by the bureaus can include whether you are paying on time, how much you are paying, how often you pay, when the account was opened and other details. The credit report also includes matters of public record such as bankruptcies, tax liens or information reported from collection agencies.
The records collected are massive. Experian North America, for example, manages more than 220 million consumer credit files and processes about 60 million account updates each day.
If not for the credit bureaus, we'd have to rely on a lender's personal judgment and the biases that could accompany it, whereas the reporting agencies are designed to ensure transparency and objectivity in the credit system, Julliard says. Credit bureaus don't know everything about you, however. They are not allowed to collect and report information about your income, employment, race or ethnicity.
What they aren't
Although credit reporting agencies play a large role in credit decision making by a lender, the bureaus themselves don't have any power over such decisions. “The bureaus do not create or generate any information. We receive it and compile it from issuers,” says Griffanti. That means they don't determine who qualifies for what loan or at what rate.
“Credit scores are generated by information on your credit report, but it is not part of the report itself,” says Griffanti. In fact, there are numerous scoring models (the most common is FICO), and your score from each bureau will vary slightly, since not every lender reports to all three bureaus.
It may seem intimidating that your personal information is being collected and viewed electronically every day, but rest assured that you have rights. But, it starts with you.
First off, the bureaus are required to show you your credit reports once a year for free. In fact, they maintain AnnualCreditReport.com for that purpose. Ideally, check one of the reports every four months for any inaccuracies or discrepancies.
“The most important thing to know is that getting angry or upset or frustrated about errors doesn't do any good.”
–Paula Langguth Ryan, author
If you see a problem, write to the credit bureau, rather than going online, because you can waive your right to a jury if you accept the online conditions. Here are the addresses for Equifax, Experian and TransUnion.
The bureaus are required to notify you of the results of the investigation within 30 days, and they have to fix mistakes as soon as possible, Griffanti says. You only need to contact one of the three bureaus as they are required to notify each other of any disputes.
Errors on your credit report can range from an incorrect address or misspelled name to fraudulent accounts that were opened in your name without your knowledge. You could also spot mistakes made by lenders or via human error in which payments might not have been properly recorded.
“The most important thing to know is that getting angry or upset or frustrated about errors doesn't do any good. It just stresses you out,” says Paula Langguth Ryan, debt negotiation specialist and author of “Bounce Back from Bankruptcy.”
“I recommend sending any supporting documentation with your correction,” says Ryan (rather than waiting to be asked for it). It might be a copy of a canceled check showing a payment, or a letter from the creditor saying it made an error.
Typically, if you've corrected an error with one agency, the others should receive the information eventually as well. “But even so, go ahead and pull your report from the others to make sure,” says Griffanti.
More serious issues, such as suspicious charges or bills for an unrecognized creditor, could signal fraud or identity theft. In those cases, you should take advantage of the bureaus' services to protect your identity. You could begin by adding a “fraud alert” to your file that will require banks/creditors to take certain steps to verify your identity prior to issuing new credit or increasing a limit on an account you already have.
You also have the option to place a “freeze” on your credit report. That function prevents your credit report from being accessed at all. That also means you'll have to temporarily lift the freeze every time you want to apply for a new line of credit, says Griffanti.
Overall, think of a credit bureau as basically an information clearinghouse, says Ryan. At the end of the day, you're the real power behind the data, and the only one who can truly manipulate your credit file to your financial advantage.