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Credit Reports

How do they work?

Business man with the text Whats your Score? in a concept image

If you're thinking of buying a house or car, or if you're applying for any other type of loan, you've probably been advised to check your credit report beforehand. A credit report tells potential creditors how financially responsible you've been, and how risky it may be to lend to you. But beyond this surface-level explanation, how do credit reports actually work? Here are the basics to help you in understanding credit reports.

The Three Major Credit Bureaus

In the United States, there are three major credit bureaus that collect information on your credit history and generate credit reports. These bureaus as Equifax, TransUnion, and Experian. Each of these bureaus is a private company, not a government agency. However, they are closely regulated by the restrictions put forth in the Fair Credit Reporting Act.

Each credit bureau has slightly different criteria that they use to generate the credit scores they assign individuals. However, they more or less rely on the same information to generate the longer "report" that creditors can access. Some banks and lenders only check with one credit bureau before issuing you a loan. Others check two or three different credit reports.

How Credit Bureaus Gather Information

So, how do the credit bureaus go about collecting the information they put in your credit report? Contrary to popular belief, they do not call around to banks and utility companies. Instead, banks, companies, and other lenders send information to these credit bureaus. This is done voluntarily. Not every lender reports to all three credit bureaus.

This is something to keep in mind if you're trying to boost your credit score and improve your credit report. Before you take out a loan or open an account with a company, ask what credit bureaus they report to. If you need to build your credit, working with utility companies that report to credit bureaus is a great way to do it. You have to pay utility bills either way.

What Lenders See on a Credit Report

When a lender checks your credit report, they will see a history of the past loans you have taken out, when you paid off those loans, how much the loans were for, and whether you made any late payments. They'll also see how much revolving credit you have available (usually, in the form of credit cards). 

Lenders also see a credit score along with each report. This score is generated by analyzing the information in the credit report. The higher the score, the better. Scores fall between 300 and 850. If you have a score of 690 or higher, that is considered "good." A score of 720 or higher is considered "excellent." Those with credit scores between 630 and 689 are considered to have a "fair" score, and anything under 629 is considered "bad credit."

Scores are generally similar, although not always identical, between the three credit reporting bureaus.

Incorrect Information on Credit Reports

Sometimes, credit reporting bureaus make mistakes. A submission that was supposed to go to someone else's report may go to yours, or a number may be entered incorrectly. This is why it's so important to check your credit reports at least yearly. If you find any incorrect information, you can report it to the agency, and they will remove it. This is generally a smooth process, as discrepancies are not uncommon.

Understanding credit reports is not that difficult once you know the basics. Keep an eye on your reports so you know what lenders are seeing, and work on improving your scores over time.

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