How Credit Bureaus Work

Data for Sale
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Credit bureaus are information warehouses. They gather information about you (and millions of other consumers) and sell that information to lenders and others who want to know about your borrowing behavior.

What do credit bureaus do?

Whenever you apply for a loan, lenders want to know if you’ll repay the loan. To help them figure that out, they look at your history of borrowing: have you borrowed money in the past, and did you repay those loans? Credit bureaus have the information that lenders use to make those decisions.

A credit bureau functions as a database of information about you. That information is used to create a credit score, which most lenders use as criteria for approving your loan. The raw data, before it is used to create a credit score, is known as your credit report.

Your credit reports show what the credit bureaus know about you, and you’re allowed to view these reports for free every year.

Credit bureaus simply gather and sell data. They do not decide whether or not your loan will be approved. For example, when you apply for a loan, your bank might want to get your credit score. The credit scoring model (basically a computer program) is designed by FICO, and the data might come from Experian, one of the most popular credit bureaus. Your bank will decide what scores are acceptable to them – making the ultimate yes or no decision – using the data it gets from the credit bureau.

Where does the information come from?

Credit bureaus get information from several sources – then they package and sell that information to others:

  • From lenders: much of the data comes from lenders. If you’ve borrowed money in the past, there’s a good chance that your lender reported that loan to one or more credit bureaus. Some lenders don’t report your borrowing activity, but most do. If you’re trying to build credit (because you don’t have a credit history, or you need to rebuild a troubled history), it’s best to work with lenders that report to credit bureaus.
  • Public records: credit bureaus also get information from public records. For example, they might want to know if you have any history of legal judgments against you, if you’ve ever filed for bankruptcy, or if you’ve been through foreclosure. Lenders could also look up that information, but it’s easier for them to buy it from a credit bureau.
  • Other sources: other sources of information are increasingly used to create “alternative” credit reports. Bills you pay for utilities, memberships, and more can sometimes affect your ability to borrow. Instead of the traditional Catch-22 (you can’t get credit unless you already have it), there are more ways to show that you’re responsible about paying bills.

Types of Information

There are numerous of credit bureaus, and each one works differently. However, most big lending decisions are based on information stored at the three major credit reporting companies (Equifax, TransUnion, and Experian). Other credit bureaus are looking for similar types of patterns – how regularly you pay bills.

1. Personal Information

Personal information helps the credit reporting companies to identify you and distinguish you from other borrowers.

  • Name, address, Social Security Number, date of birth
  • Previous addresses
  • Employment history

2. Public Records

The credit reporting companies collect information from court systems. This only includes judgments related to your finances (no traffic tickets, for example).

3. Inquiries

Every time somebody asks the credit reporting companies about your credit, they make a record of it.

4. Trade Lines

Perhaps the most significant information collected by the credit reporting companies, trade lines are records of your loans.

They detail the vital characteristics of each loan. They may go by a variety of names depending on the credit reporting company, but the general characteristics in interest are:

  • Type of loan
  • Creditor name
  • Date opened
  • Date of last activity
  • Loan balance
  • Maximum balance
  • Account status
  • Comments
  • Your liability on the account
  • Amount past due
  • Minimum payment due
  • Amount of your last payment

Not at Credit Reporting Companies

The major credit reporting companies do not collect information on the following:

  • Bounced checks (see ChexSystems)
  • Race
  • Ethnicity
  • Sex
  • Political views
  • Income

Some information is kept at the credit reporting companies, but not displayed on your credit reports. Negative items that have been closed out over seven years ago generally fall into this category. The data still exists at the credit reporting company but is not included in most credit reports.