In your financial journey, credit can be a major player in your life.
And while you might be familiar with a credit score or credit report, you may not understand the credit bureaus who work behind the scenes compiling that information.
What are these mysterious credit bureaus? And more importantly, what role do they play in your life?
Here’s everything you need to know about credit bureaus. And, how they could determine your financial future.
What are the big 3 credit bureaus?
The first thing you should know is that there isn’t just one credit bureau. There are actually three credit bureaus: Experian, TransUnion, and Equifax.
However, Nancy Bistritz, Director of Public Relations and Communications at Equifax notes that “There are smaller agencies, but almost all of them get information from one or more of the three national credit reporting agencies.”
“National credit reporting agencies adhere to the requirements of the Fair Credit Reporting Act,” adds Bistritz.
Although there are three credit bureaus, they all perform similar functions and provide credit reporting services for consumers.
“A credit bureau or credit reporting agency collects information relevant to people’s credit and financial history and then uses proprietary algorithms to develop a credit report that helps potential lenders rate borrowers’ reliability,” says Heather Battison, Vice President of TransUnion.
And while the three big credit reporting agencies are similar, they’re not really the same.
Bistritz says that all of the credit reporting agencies have their own credit scoring models. They also have their own additional products and services they may offer to consumers.
What do credit bureaus do?
You may not realize it, but credit bureaus play an important role in your financial life.
They help compile data that lenders use every day via your credit report. Each of the three credit bureaus also provides a credit report. It essentially has a lot of information about your personal credit history.
According to Battison, credit reports contain a variety of information, including:
- Identifying information (name, address, birthdate and social security number)
- Employer history
- Consumer statement
- Account information
- Public records
All of the information in your credit report is used when calculating your credit score.
Your credit report and credit score are used in many situations. For example, getting approved for an apartment rental, credit card, car loan, and more.
Ultimately, credit bureaus act like a hub for credit information and a middleman between the lender and individuals.
“A credit bureau, like Experian, gathers information from thousands of organizations and organizes the information so that it can be used to assess lending risk,” says Rod Griffin, Director of Public Education at Experian.
If a lender wants to get a clear picture of your creditworthiness, they will look to your credit report, which the credit bureau will provide.
The good news is that credit reporting agencies help lenders make objective decisions based on your credit history. Not on other factors.
“Before credit reporting, lenders might approve a loan because they knew the applicant’s father, or they might have declined a loan because they didn’t like the color of a person’s skin,” explains Griffin.
The credit report agencies now provide all of a borrower’s data. So lenders can look at past credit history and base approval on financial information and behavior, rather than on other factors unrelated to your finances.
What makes the 3 credit bureaus different?
You may wonder, if all three credit bureaus do the same thing, why are there three of them and not just one?
“A good analogy is the three major U.S. auto manufacturers: Ford, General Motors, and Chrysler,” says Griffin. “All three manufacture automobiles. The cars have engines, four wheels, and a steering wheel.”
“But cars from each company differ in many ways,” Griffin explains. “Styling, engine design, price point, available colors, size, economy, and so on. The national credit reporting companies are similar.”
Each of the credit bureaus has their own reporting systems. They also use their own proprietary algorithms to create a credit report and credit score.
How do the 3 credit bureaus affect my life?
The three credit bureaus work to help lenders get the information they need about potential borrowers while offering consumers an accurate picture of their credit history.
However, it’s important to note that not all businesses share the same information with credit agencies.
“Not all creditors report to all three credit agencies,” says Battison. “So the information in each report can vary, resulting in different scores.”
In other words, if you check out all three credit reports, they may have different information that can result in different credit scores.
While this may seem odd, lenders often work with the credit reporting agencies that fit their needs.
“Lenders and other businesses determine which credit reporting company or companies they work with based on their specific needs, just like a person buying a car purchases it from the company that builds the vehicle most suited to their needs,” says Griffin.
So even though your credit history may vary among the three credit reports, they still give an accurate picture of your creditworthiness.
How do I check my credit?
The good news is you can check all three credit bureaus’ credit reports for free once a year at AnnualCreditReport.com.
It’s a good idea to check your credit report annually to make sure everything is correct. And, to help you prevent identity theft.
It may also be a good idea to check your credit report before applying for a mortgage, buying a car, or making any other big financial decisions.
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