For anyone who’s ever rented an apartment, applied for a loan, or done anything where their financial health comes into question, they’re likely familiar with both a credit report and credit score. Obtaining both is easy these days, thanks to a wealth of free online services.
But where do credit reports and scores come from? Who is sourcing and compiling all of that data? In the US, agencies called credit bureaus collect all of the information that goes into building credit reports and formulating credit scores. They collect this information from creditors (i.e., lenders and credit card issuers) and also have access to other personal financial information from businesses and government organizations. The work performed by the bureaus allows creditors to better assess applicants for financial products, like credit cards or personal loans.
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Who are the big three bureaus?
In the US, there are three main credit bureaus: Equifax, Experian and TransUnion. From their inception, these three bureaus, otherwise known as credit reporting agencies, have made it their business to collect consumer financial data to provide to creditors, who use the data to determine the creditworthiness of applicants. While there are other smaller agencies that provide similar services, the big three reign supreme when it comes to providing credit reports and scores.
How do the bureaus operate?
Credit bureaus gather personal financial information from financial institutions, businesses, and government agencies, which is all used to compile credit reports and calculate credit scores. The information gathered by the bureaus can include: payment history, outstanding debt, accounts that have gone into default, and, in a worse case scenario, bankruptcies.
The bureaus then sell back the reports they’ve compiled to banks, lenders, credit card companies, and any other party that would need to assess a consumer’s credit health. For example, a personal loan lender would use an applicant’s credit report and score, obtained from a credit bureau, to determine how much the applicant can borrow and at which interest rate and loan terms.
With timely payments, personal loans can be an opportunity to improve your credit score and overall financial health.
How do bureaus calculate and maintain credit scores?
Bureaus also use the data in credit reports to calculate each borrower’s credit score. They input the data into an algorithm that rates a consumer’s creditworthiness. Scores range from 300 (very poor) to 850 (perfect).
The two major scoring models used to determine credit scores are created by FICO and VantageScore. Since every consumer’s financial activity is constantly changing, the same goes for their credit report and score. To stay current, credit bureaus frequently update their records with new information from lenders and other financial institutions. In addition, both FICO and VantageScore have evolved their models to more accurately reflect consumer financial behavior.
What are the main differences between the bureaus?
Each of the big three bureaus essentially do the same thing, but there are some variances. While the bureaus all arrive at the same score when using the VantageScore model (which is a joint venture between Equifax, Experian, and TransUnion) their FICO scores will vary from one to another, as each bureau’s use of the model is slightly different. In addition, while the bureaus are more or less collecting the same data from the same parties, they may receive their data at different time intervals, which is reflected in the reports they sell back to creditors.
The bottom line
When it comes to applying for a financial product, like a personal loan, the three major credit bureaus may hold the keys to getting approved or not. As a result, it’s important for consumers to constantly keep their credit in check, as the information bureaus provide to lenders is always evolving. Still, no matter where your credit score currently sits, there may be personal loan offers available that meet your current needs.