Considering how much power the credit bureaus have over your creditworthiness, you need to know how credit bureaus work. Because the more you know about how they work, the more you’ll know about how to repair your credit, or simply build a better credit score. So get the facts on the big three national credit bureaus – TransUnion, Experian, and Equifax.
How credit bureaus work (and how to make them work for you)
1) Credit bureaus collect information about you
The credit bureaus, also known as credit reporting agencies, start collecting information about you when you open your first credit account. That’s when they receive your personally-identifying information, including your name, address, date of birth, social security number, and employer, as well as information specific to your first credit line.
From that point on, there are few different ways credit bureaus will continue to collect information about you:
- When you apply for credit and the creditor checks your credit. The credit bureaus call this a “hard inquiry” made by a potential creditor.
- When you request a look at your own credit. The credit bureaus call this a “soft inquiry.”
- When you open a new line of credit. The creditor will share with the credit bureaus the personally-identifying information you provided to them, which may update your current address and employer if they have changed since the last time you applied for credit. Of course, they will also collect information specific to your new credit line.
- When you notify an existing creditor of a new address or name change. You can expect them to provide that information to the credit bureaus the next time they update your reports.
- When data furnishers (e.g., credit card issuers, auto lenders, mortgage lenders, etc.) report your payment history to the bureaus. This information includes:
- Your credit limit or loan amount
- How much you owe
- The date and amount of your last payment
- Any past due amounts and late payments
- Whether accounts have been charged off
- When utility companies, cell phone companies, doctors, and hospitals turn your accounts over to collections. In other words, these are accounts that only get reported when something is wrong. So provided you keep bills like these current, there will be nothing to report to the bureaus at all.
- When you have new accounts opened by collection agencies collecting on old debts.
- When the credit bureaus look through any public records on you, making note of foreclosures, wage garnishments, tax liens, and bankruptcies.
2) They compile information about you into credit reports
All the information collected by credit reporting agencies gets compiled into credit reports. Potential creditors look at these to judge your creditworthiness.
The credit information on your credit reports is broken down into sections, including:
- Identifying information
- Credit accounts
- Credit inquiries
- Public records
- Collection items
You never know which credit bureau a creditor is going to use to (a) check your credit or (b) report your payment history. That means your credit reports from all three major bureaus may contain different sets of information.
3) They turn your credit reports into credit scores
This gives creditors a three-digit number they can use to easily judge your creditworthiness. Of course, since every credit bureau may have a different set of information about you, the generated scores may be different, too.
Plus, the same credit report generates two different types of scores:
- FICO Score, which is the most widely used by creditors when making lending decisions
- VantageScore, which was created to compete with the FICO Score
That said, FICO has multiple credit scores of its own. There is the general FICO Score, but also industry-specific scores for lenders to use when making decisions about extending credit for credit cards, auto loans, and mortgages.
4) Credit bureaus provide access to your credit reports and scores
The credit bureaus sell your credit information to anyone with “permissible purpose” (e.g., lenders, landlords, insurance companies, utility companies, etc). You too can (and should) look at your credit reports and scores regularly to confirm accuracy. (And since each credit report may contain a different set of information, it’s important to check all three.)
Every credit bureau is required by law to provide you with one free credit report per year, which you can request through AnnualCreditReport.com. You can also see the information on your credit reports through free credit monitoring sites. Beyond that, you can purchase your credit reports any time you like through each of the credit bureaus.
Unfortunately, the law does not require you to receive free access to your credit scores.
For your FICO Score, check your credit card statement. Many credit card issuers now include FICO Scores there. Beyond that, you can purchase your FICO Scores – from all three credit bureaus – through myFICO.com.
For your VantageScore, the same free credit monitoring sites that give you credit report information for free will provide you with updated VantageScores, too. While lenders may not rely on them as much as FICO Scores, keeping an eye on your VantageScore will at least give you a good idea of where your credit generally stands and how it is improving (or tanking) depending on your credit behavior.
5) They help creditors prescreen consumers for credit card offers
You know those “preapproved” offers you get for credit cards? It’s with the help of the credit reporting agencies that creditors are able to make these prescreened offers. Credit card issuers are looking for consumers who meet certain criteria. The bureaus search their database for those who qualify, or they qualify the names of consumers that the credit card issuers provide to them.
On the one hand, this can be a good way of seeing the kind of credit limits and interest rates you might qualify for – a helpful comparison tool when shopping around for a new credit card.
On the other hand, preapproved credit card offers don’t always represent the best deals. Plus, they can open you up to having your identity stolen if a thief gets a hold of the offer.
Fortunately, you have a choice. If you’d rather not receive prescreened credit card offers, you can opt out through the credit bureaus. Here’s how to opt out (or opt back in), which you can do for 5 years or permanently.
6) They investigate consumer disputes
If you discover an error on your credit reports, you have the right to send a credit dispute (with supporting documentation) to the appropriate credit bureau(s). There are any number of reasons why you may need to dispute something on your credit reports, like a:
- Misspelled name
- Credit line you don’t recognize
- Late payment for an account you know you paid on time
- Incorrect credit limit or balance
- Collection account for a trade line you already paid off
The credit bureau is then required by law to investigate the listing for accuracy. They do so by reaching out to the appropriate data furnisher for verification of the disputed item.
Here’s how each of the credit bureaus describes its own way of doing things:
Note, all three credit reporting agencies have online dispute options. Don’t do it. Create a paper trail by sending everything via regular certified mail with return receipt requested.
You should expect to receive a response from them within 30 to 45 days. If the credit bureau is satisfied with a data furnisher’s verification, nothing will be changed. If the data furnisher does not verify the disputed item, it should be corrected (or removed if appropriate).
If you are not happy with the result of the dispute, you can always dispute directly through the original creditor or collector. If that doesn’t work, you can submit a complaint to the Consumer Financial Protection Bureau (CFPB).
7) Credit bureaus can place fraud alert on credit reports
If you suspect your personal or financial information has been stolen, placing a fraud alert on your credit reports is a good way to help protect you from identity theft. You can still apply for credit – and potential creditors can still see your credit reports – but they’ll have to contact you for verification first.
In other words, a fraud alert makes it harder for identity thieves to open new accounts in your name.
There are three types of fraud alerts:
- Initial fraud alert, which lasts 90 days. If you want to renew the alert after 90 days, you can.
- Extended fraud alert, which lasts 7 years. This may be your best bet if thieves have already used your personal or financial information to steal your identity. With this option, you will also be removed from prescreened credit offers, and you will have free access to your credit reports through AnnualCreditReport.com twice a year (a right you normally only get once a year).
- Active duty military alert, which lasts 1 year. This is a good way to protect yourself when you are deployed out of the country.
Contact the credit bureaus to request a fraud alert:
Placing a fraud alert is free, but you will need to provide proof of identity. Note, you can expect the bureau you contact to notify the other two bureaus, ensuring the same alert appears on all three of your credit reports.
8) They can freeze credit reports
As helpful as a fraud alert can be – requiring creditors to contact you directly for verification before extending new credit – you can protect yourself further with a credit freeze, also known as a security freeze.
UPDATE: In the wake of the Equifax hack, it is recommended that you place a credit freeze on all of your credit reports.
With a credit freeze, you prevent potential creditors from seeing your credit reports under any circumstances. This can be a big help in preventing identity thieves from opening new accounts in your name, as most creditors need to see your credit reports first.
Contact the credit reporting agencies to request a credit freeze:
Just keep a few things in mind:
- This will make it difficult for you to apply for credit. To do so, you will need to request a lift on the freeze when you’re in the market for a new credit card or loan. You can also ask for the credit freeze to be removed entirely.
- There are some people who will still be able to see your credit reports – you, existing creditors, and some government agencies under certain circumstances (e.g., court order, search warrant).
- It takes a few days to lift a freeze, so be sure and notify the credit bureaus in advance of your need to apply for new credit.
Unlike credit alerts, credit freezes are not necessarily free. You may be able to get it for free if you meet certain criteria, but the cost is usually between $5 and $10. It depends on your state.
9) They offer credit monitoring and identity theft protection
All three of the credit bureaus offer consumers subscription-based services for credit monitoring and theft protection. The offering is a little different from one bureau to the next, but includes things like:
- Providing you year-round access to your credit reports and scores
- Alerts when there are notable changes to your credit reports
- Locking and unlocking your credit reports
- Lost wallet assistance
- Internet scanning (to see if your information is being bought and sold)
- Automatic fraud alerts
- Identity theft insurance
But as good as all of that might sound, these monthly subscription services can be costly – money that might be better spent paying down debt or going toward savings. That’s why it’s always best to do what you can for free.
Most notably, you can keep a watchful eye on your credit reports and scores through free credit monitoring sites that give you year-round access, too. Should you see an incorrect listing or a new account that you didn’t open, you can alert the credit bureaus immediately. Read our review of the top five free credit monitoring sites.
UPDATE: Unfortunately, many free credit monitoring sites won’t work while a credit freeze is in place. Credit Karma is a notable exception; it just has to be unfrozen during the sign-up process.
At best, the credit bureaus are your credit score’s best friend, reflecting the accuracy of your good payment history and helping you correct mistakes. At worst, the credit bureaus can feel like the enemy, making it feel impossibly difficult to move past your financial missteps. Your best bet is the same in either case – learning how credit bureaus work so you know how to make them work for you.