How do credit reporting agencies work?


Quick Answer

Credit reporting agencies collect data from banks, credit card companies and other companies that provide financing. They use this data to prepare a report on borrowers that indicates their creditworthiness based on their previous and current use of credit and their payment history.

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How do credit reporting agencies work?
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Full Answer

There are three major credit reporting agencies in the United States: Equifax, Transunion and Experian. Lenders may pull a credit report from one or all of these companies when evaluating whether to extend credit or financing to an applicant. The agencies themselves do not make decisions about extending credit, but simply provide a profile of data to the lender to aid it in its decision.

The applicant's credit history is usually summed up into an aggregate numerical score that mostly serves to provide quick initial filtering of the data for lenders. This score ranges from 501 at the low end to 990 at the high end and is meant to give lenders a general idea of how likely borrowers are to pay their debts in full. Full credit reports show detailed payment history as reported by lenders.

Credit bureaus do not always catch incorrect or fraudulent information on consumer credit reports, and a consumer may have three different scores with the three different bureaus. Under U.S. law, each of these bureaus must provide one free copy of a consumer's credit report to her upon request per calendar year so that she can monitor them for accuracy and fraudulent activity. Getting additional copies requires paying a small fee.

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