How do credit reporting agencies work?

You can hardly find an American who hasn’t heard about Experian, TransUnion or Equifax. These credit reporting agencies play an important role in the process of collecting and reporting credit information. Because of their efforts, lenders can make their credit decisions within minutes instead of hours or days.  

If you have ever had a credit card or applied for a loan, then you have a credit history. It is collected and maintained by companies called credit reporting agencies or credit bureaus. They gather information from credit card issuers, retailers, banks, finance companies, mortgage companies, public records and other reliable sources to create an in-depth credit report. 

Your credit report indicates a lot of aspects of your borrowing activity: what types of credit you use, your borrowing limit, the length of time your accounts have been open, and, what is the most important, whether you have made timely regular payments. The ability to quickly collect and provide all this information is what makes credit reporting agencies extremely useful.

Credit agencies do not grant or deny credit. They make your credit history available to the following requestors: current and prospective creditors, employers, insurance agencies, government agencies and other individuals and organizations with a legitimate business need. Your spouse, kids, relatives, friends, neighbors and coworkers can get access to your credit file only if you give them a written permission.

Credit reporting agencies maintain files on millions of borrowers. Every time you apply for a new loan or credit card, lenders making credit decisions buy your credit report from the credit bureaus. Based on the information it contains, they decide whether to extend you a loan and at what interest rate. 

For many years, the information collected by credit bureaus was hidden from consumers. People didn’t have any idea why they were denied credit or whether or not their reports contained inaccuracies or errors. The Fair Credit Reporting Act of 1971 and recent legislations gave U.S. citizens a right to:

•    Get a complete copy of their credit report (for a fee). 
•    Get one free credit report every 12 months from each major credit bureau.
•    Get a free copy of the credit report if they have been denied credit. 
•    Know exactly who has bought a copy of their credit report in the past six months. 
•    Correct errors and inaccuracies on their credit report. 
•    Add a 100-word notice to their credit report. 
•    Have negative information removed from their credit file after 7 to 10 years. 
•    Freeze their credit report. 

The biggest credit reporting agencies, also known as the "Big Three" are Experian, TransUnion and Equifax. They get all the attention because they maintain the largest national databases of consumer credit information. 

Besides them, there are dozens of smaller local and industry-specific credit reporting agencies that provide clients with credit reports and other "risk-management" services. There are also international credit bureaus that focus on a particular area or region.

The Big Three credit reporting agencies are independent for-profit companies that collect information in a bit different ways. For example, there are some lenders that report information only to one credit bureau. That’s why a credit report from Experian may vary from a credit report from TransUnion or Equifax. 

The Fair and Accurate Credit Transactions Act of 2003 gives U.S. citizens the right to get one credit report from each of the three major credit bureaus - Equifax, TransUnion, and Experian - once every 12 months. You can order a free credit report on the Internet at www.annualcreditreport.com.

However, keep in mind that credit bureaus aren’t obliged to provide free credit scores. You can purchase them directly from the individual credit reporting agencies for around $10. You can also buy as many credit reports as you want or order additional services, for example credit monitoring.