How Credit Reports Work
An overview of the three major bureaus and how your information gets onto your file.
Whenever you apply for any type of credit or financing, a credit report is pulled from at least one of the three major credit bureaus. While there are hundreds of smaller credit bureaus around the country, virtually every credit bureau is affiliated with TransUnion, Experian, or Equifax. These credit bureaus collect and maintain information on the vast majority of Americans, but they are not affiliated with the government in any way. The credit bureaus are for-profit corporations that sell your personal information for money.
The credit bureaus receive your personal information through the same lenders who grant you credit. They have agreements with each of these credit grantors that require the credit grantor to inform the credit bureaus of everything that occurs in your relationship with the credit grantor. If you make a payment late, the negative credit listing is quickly reported to at least one of the three major credit bureaus and is added to your credit history.
Credit reports are not just a record of how you are currently managing your credit accounts. Credit reports are histories of everything you are doing with your credit now, and everything you have done in the past. The credit bureaus collect this information, list it on your credit report, and then sell it to credit grantors who wish to see your credit history before they decide to lend you money. The credit grantors who review your credit are especially interested in any negative credit. If you have shown any tendency to pay late, or to disregard your financial commitments in the past, then the creditors' computers will immediately reject your application. Just like when you were in grade school, your credit report is your financial report card to the world.
What Appears on Your Credit Report
Four main categories of information show up on every credit file.
Merchant Trade Lines
All regular credit lines such as department store cards, auto loans, mortgages, and credit cards. Any history of late payment, bankruptcy inclusion, charge-off, or repossession is considered negative by all credit grantors.
High impactCollection Accounts
When an account is referred to collections because of delinquency or a bad check, it appears here. Collection accounts can be paid or unpaid — either way, all credit grantors consider them very negative.
High impactPublic Records
Bankruptcies, judgments, liens, satisfied judgments, and satisfied liens. All court records — including satisfactions — are considered negative by all credit grantors.
High impactInquiries
Every time a potential credit grantor looks at your file, an inquiry appears. A few inquiries over two years usually have no effect. Many recent inquiries can make grantors nervous and lead to denial.
Medium impactFor a deeper dive on what you can and can't change on your report, see Does Credit Repair Really Work?
Common Questions, Answered
The questions almost everyone asks once they actually see their report.
How Long Will Negative Information Stay on My Report?
The Fair Credit Reporting Act (FCRA) requires that most negative credit items be deleted from your credit bureau file in no more than seven years — except for a Chapter 7 bankruptcy, which can be reported for up to ten years. These are the time limits for reporting negative credit. The creditor or the credit bureau can choose to have the negative information deleted earlier if they please. Inquiries may remain on the report for up to two years. If you find errors on your report, you have the right to dispute them yourself directly with the bureau — for free — under the FCRA.
Can I See My Credit Report?
Yes — and under federal law, you're entitled to one free copy from each of the three bureaus every 12 months through AnnualCreditReport.com. Once you receive your report, you may find it hard to read because the information is listed in unfamiliar codes. TransUnion and Equifax reports are particularly difficult to interpret. Experian reports are relatively easy for most people to read. A combined 3-in-1 report is usually the easiest to compare side-by-side.
How Much Bad Credit Does It Take to Be Denied?
As you may have already experienced, even one small late-payment listing can result in a credit denial. It is a myth that a large amount of positive credit can outweigh some negative credit. Any negative credit whatsoever can become a substantial obstacle. For practical steps you can take to recover, see How Do I Improve My Credit?
Who Looks at My Credit Report?
With each passing year, your credit report is used more and more often as a yardstick to measure your character. Prospective creditors will always review at least one of your reports before granting you credit. It is increasingly common for insurance companies to review your credit before extending auto or health insurance. Many employers now check credit before considering you for a position. And if you rent, you may have already been through a credit check to determine your worthiness as a renter. Understanding Your Credit Score covers what landlords and lenders actually pull.
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