There are three credit reporting agencies (CRA) in the United States: Equifax, Experian and TransUnion. If you apply for loans of any kind, potential lenders obtain your credit report form the CRAs. At times, even potential employers may obtain your credit report. Here is a simple guide to how credit reporting works.
The first time you apply for any kind of credit or loan, whether for a credit card, mortgage, rental or revolving store account, a file is opened at the CRAs. It includes your name, birthdate, address and social security number. It includes your current and previous addresses and employers.
Type of information reported.
Companies report to the CRAs the following information concerning the type of credit they granted you.
- Credit cards, including revolving store accounts.
- Auto loans.
- Rent payments.
- Mortgage loans.
- Loans that have been paid or are inactive.
Matters of public record are also reported, such as:
- Any type of lien, including tax liens, that has been filed.
- Court judgments.
- Bankruptcy filings.
- Unpaid child support.
For each loan, your creditors supply the CRAs with:
- The date the loan was granted.
- The amount of the loan if for a lump sum.
- The credit limit for revolving credit cards.
- Terms for repayment of the loan.
- Interest rates on all loans, including credit cards.
- The current balance of the loan.
- Whether you have paid the loans according to the terms of the loan. This includes whether or not you have made your payments on time.
- Whether or not any account has been turned over to a collection agency.
- Any inquiries for your credit report are also noted.
How do the CRAs calculate my credit score?
Each CRA has its own method for mathematically computing the information reported to it and turning it into a number referred to as your “credit score.” They all consider the following factors, although they may each give a different weight to the individual factor.
- The type of credit you have, whether mortgage or revolving credit cards.
- The length of the loan. For example, the longer you have had a credit card and made timely payments, the better your credit will be. If you have recently taken out several credit cards, this may lower your credit score.
- The total amount of money you owe.
- Your payment history.
They all calculate a score between 300 and 850. It is the final number that is reported to the lender. The higher your score, the better credit risk you are and the more likely you are to get the loan you have applied for.
How does a lender use my credit report.
Lenders have different criteria for granting loans. Your credit score is only one factor they use in deciding whether or not to grant your credit request. The lender will also evaluate your current income in comparison to your overall debt. A recent history of timely payments may compensate for earlier years of credit problems.
If lenders consider your score low, they may still grant your credit request but charge a higher interest rate.
Reasons to check your own credit report.
You may not think you need to personally check your own credit report. In fact, experts recommend that you check it at least once a year for the following reasons.
- Mistakes are made. Just one example is that information may be on your report that belongs to someone with a similar name. You can file a dispute with the CRA and ask them to fix it.
- You may have paid a debt that was causing you to have a low score with the understanding that it would no longer be on your report. When you find it still there, you can contact the creditor and request them to remove it.
- If you had a period of time when it was difficult to pay your bills on time due to illness or loss of a job, the CRA may allow you to write a letter of explanation that will be a permanent part of your credit report.