Everything You Need to Know About Credit Reporting Agencies
Credit Reporting Agencies, or Credit Bureaus, are organizations that gather and categorize information that they then assemble to make a credit report. With this report, creditors, banks and mortgage companies can then rank individuals on their credit score to decide an individual’s accountability to pay back a debt or loan.
Experian, Equifax, and TransUnion are the largest and most well-known Credit Reporting Agencies in the world. While the basics are relatively simple, the subject of credit reporting can quickly become complex. Understanding the intertwining formulas that make up credit to check credit reports are what makes these organizations so valuable to the individual and the overall economy.
“A person’s credit report is one of the most important tools consumers can use to maintain their financial security and credit rating, but for so long many did not know how to obtain one, or what to do with the information it provided.”
What Makes Up My Credit Report?
To summarize, Credit Reporting Agencies gather and categorize data to determine a number that is associated with credit. They examine organizations where you make payments, such as banks, credit card companies, phone companies, lenders, mortgage companies, and utility companies in order to determine your frequency of payments, late payments, or returned checks—among other factors.
Within their list of subjects, they then identify positive and negative correlations during your relationship with those companies. In addition to current bills, they check on things such as the number of times you have applied for more credit. These standings, along with basic personal information make up a credit report. Most lenders then use the FICO Score from the Fair Isaac Company to make a decision.
What is an Annual Credit Report?
In addition to banks and lenders wanting up-to-date information, it’s important for individuals to also get frequent updates on their rank. In terms of an annual credit report, federal law allows for individuals to get an update every twelve months. With a free credit report, you can make sure all of your information is up-to-date.
Credit reports can affect everything from mortgage rates to apartment rentals to credit card approvals, and even career opportunities. In addition to making sure you do not miss any payments—like a forgotten gym membership or increased phone bill—reviewing your report can make sure there are no signs of identity theft.
As Warren Buffet once said, “Someone is sitting in the shade today because someone planted a tree a long time ago.”
How Frequent are Credit Reports Updated?
Experian, Equifax and TransUnion are organizations that are different with little discrepancy. As three independent, for-profit operations, these Credit Reporting Agencies use their own calculations when determining an annual credit report.
The frequency in which individual reports are calculated is determined by how often lenders need to check your score and whether or not the accounts are active. While certain information remains the same, like a name or social security number, other information changes over time, so credit score can improve over time.
In a general sense, creditors like banks or mortgage companies report to credit agencies each month as bills arise. With this in mind, a single late payment on a credit card or successful bill pay-off may show up the following billing cycle.
Since it can take a month for a payment to show up, that means an improved score will often take some time too. It’s best to keep up with your score often rather than find surprises when you need a good score to appear. However, credit activity such as an application for credit may appear more quickly than others.
In an example on Credit Karma, they infer that you may owe $5,000 on a credit score when you wish to purchase a new home. If your overall credit line has a ceiling of $12,000, then your credit utilization ratio is 41 percent (the term credit utilization ratio refers to the amount of debt owed versus credit limit).
The site continues to say, “To get approved for the best loan, you’ll need to get your credit utilization down to 30 percent, which means paying your balance down by $1,500. You make the payment on the 1st of the month but because the credit card company only reports information on the 30th, you’ll have to wait another full month to apply for a mortgage.”
How Do I Improve My Credit Report?
“I’m super cautious [of debt]. I lived below my means in the early days, sharing an apartment [and] I even had a windowless room. I’m very big on living below your means.”
—Scott Adams, Creator of Dilbert
Late payments can unfortunately stick around like an uninvited guest at a dinner party, so they’re best to avoid in the first place. If the mistake has already been made, some faults are worse than others so it’s best to know how long these issues may linger.
If a tax debt isn’t paid, it will stick around on your credit report for seven years after the final payment has been made. For those who choose to settle the debt or avoid payment altogether, a tax lien could remain indeterminately. Judgments and collections on your credit can also hang around for seven years and a general credit inquiry may last around two years.
In a recent Forbes article, the financial magazine comments on the public’s shameful thoughts on credit. Contributor Curtis Arnold writes, “A recent survey from the National Foundation for Credit Counseling indicates that more people would be embarrassed to admit their credit scores (30 percent) than their weight (12 percent).”
Check credit score and improve your score by:
- Check that Your Limits are Current
- Dispute Mistakes
- Negotiate Debts During Misfortune (unemployment, etc.)
- Get a Credit Card and Pay On time
- Become an Authorized User, or “Piggy Back”
- Raise Your Credit Limit
How Do Credit Reporting Agencies View Bankruptcy?
“Know what happens when an individual declares bankruptcy and how it affects his or her life.”
—Marilyn von Savant, Highest IQ in Guinness Book of World Records
Investopedia defines bankruptcy as “a legal proceeding involving a person or business that unable to repay outstanding debts. The bankruptcy process begins with a petition filed by a debtor or on behalf of creditors. All of the debtor’s assets are measured and evaluated, whereupon the assets are used to repay a portion of outstanding debt.”
A Chapter 7 Bankruptcy stays on your credit for 10 years and a Chapter 13 Bankruptcy will last for 7 years.
Common Questions About Credit Cards
If you didn’t find exactly what you are looking for, consider starting out with a free annual credit report from a site like Credit Karma, Bill Guard or Annual Credit Report and remember to never pay for a credit report.
Other common questions about credit, from Discover, include:
What do I need to apply for a credit card?
Applying for a credit card is a simple, straightforward process that requires only some basic information. Students will need the name and location of their school in addition to a social security number and primary address. For security purposes, you also should know your mother’s maiden name.
How many credit cards should I have in order to build credit?
There is no “right” number of credit accounts to build a good credit score. According to Experian, there are many factors that make up a credit score (and every reporting agency has its own formula), but late or missed payments, frequency of credit inquiries, and your credit utilization ratio are all major factors. When you’re starting out with credit, it is safe to begin with one or two cards to ensure you can make payments consistently before adding more.
A more advanced move is to optimize your credit utilization ratio, possibly by adding cards or requesting higher limits. Your utilization ratio is the amount of total debt you’re carrying compared to your total credit limits. If you can responsibly manage multiple lines of credit, you can lower your utilization ratio even if you are carrying a balance on one or two cards.
Why does your APR go up if you’re making payments on time?
There are a few reasons your APR can go up even if you’re up to date on all payments. These include a drop in your credit score, the end of a card-related promotion, or a change in the prime rate if you have a variable-rate card.
Checking Your Free Annual Credit Report as Easy as 1-2-3
“Rather go to bed without dinner than to rise in debt.”
Equifax makes checking your Annual Credit Report stress-free. When considering your annual free credit report, try the following methods:
The first step is to fill out a form with basic information, such as your name, address, previous addresses, social security number, career, and income information.
Next, the business will provide you with the three scores from each of the credit reporting agencies. A “good” example may be 800 EFX, 789 EXP, and 795 TRU.
Their third step is to simply “feel confident.” Despite the score, it is important to detect fraud early, check on any unexpected charges, and quickly jump on any unauthorized credit inquiries that may hurt your future score.
Different Numbers Among Annual Free Credit Reports
It’s possible that each of the three scores could be different when finding your annual free credit report.
Credit Karma admits that the scores could come from different dates and it’s possible for scores to change frequently or infrequently over time. In addition to a difference in inspection, it’s also possible, if not likely, that the scores were calculated using different formulas when coming up with a credit report.
The article states, “Even with the same model, your scores could vary because each bureau may store information or calculate the score a little differently.” While the methods may be different, it’s also possible for the numbers involved to be different.
If each of the Credit Reporting Agencies has different numbers, then it’s impossible for them to get the same results. If this is the case, especially in drastic scenarios, check on your report immediately to know where you stand.
While some lenders report to each of the three bureaus, others may only report to one or two (if any). Basically, the off number may simply be missing relevant information that could help or hurt your overall score. In some cases, even numbers within the same bureau could be different as a single credit reporting agency could potentially use a different scoring model or new factors at any given time.
General Score Ranges
Within the major systems, ranges include the following:
300 – 850 FICO Score
330 – 830 Experian
300 – 850 Equifax
300 – 850 TransUnion
300 – 850 VantageScore
Rather than know every score, take your pick and stick with it over time.
Summary of Credit Reporting Agencies
“A man who pays his bills on time is soon forgotten.”
—Oscar Wilde, Poet
Like any complicated formula, it’s crucial to remember that credit scores are made of varied probabilities, so while it’s important to have a general idea of the score, the exact number has flexibility so do not stress over the specific digits involved.
Credit Reporting Agencies look into your bill payment history, present debt, outstanding / paid loans, along with additional financial information. They even show items such as lawsuits and bankruptcies to keep individuals in line.
Each year, individuals are invited to obtain free credit reports from the large agencies and they can also do so from smaller organizations. These reports help lenders decide what interest to charge and whether or not they should work with you at all. Keep up with these scores to stay ahead of the game.
If you find yourself in trouble, seek council. While searching for the answers, consider the methods mentioned in this text, including checking your credit limits, disputing mistakes, negotiating debts, acquiring a credit card, piggybacking, and raising your credit limit (also known as your credit ceiling).
Rather than harp on each number, choose one score to watch over openly keep an update on your basic credit health. The free sites listed in this article use an easy-to-follow formula that remains constant, so your credit can truly be in your hands.