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There are three major credit bureaus, and your credit score will vary depending on which one provided the data to create that score.
How Credit Reporting Agencies Determine Whether You Can Get a Loan
Getting approved for a loan can seem like a mysterious process. You fill out an application, submit your documents, and then wait anxiously for the lender’s decision. But behind the scenes, there are credit reporting agencies hard at work compiling information about your financial history that will factor into whether or not you get that loan.
Credit reporting agencies (also known as credit bureaus) like Experian, Equifax, and TransUnion play a crucial role in loan approvals. They maintain records on millions of consumers and provide that information to lenders in the form of credit reports. Lenders rely heavily on these reports to assess an applicant’s creditworthiness and determine if they are likely to repay the loan.
So how exactly do credit reporting agencies compile these influential credit reports, and what specific information do they provide to lenders? Here’s a look inside the credit reporting process and how it impacts your ability to get a loan.
What’s in a Credit Report
A credit report is a detailed record of your credit history spanning several years It includes identifying information such as your name, address, and Social Security number as well as a comprehensive overview of your financial accounts and payment history
Key items contained in a credit report:
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Credit accounts – Details on all your credit cards, retail accounts, mortgages, auto loans, student loans and any other types of credit. The report lists the credit limit or loan amount, account balance, payment history, and other specifics for each account.
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Public records – Bankruptcies, foreclosures, lawsuits, wage garnishments, tax liens or other judgments that are part of public record.
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Inquiries – List of all creditors and lenders who have accessed your credit report within the past two years. Helps identify if you are shopping for new credit.
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Personal information – Your name, address, birth date, Social Security number and employment history.
Where Credit Reporting Agencies Get Their Information
Credit bureaus gather data from creditors, lenders, collection agencies, public records and other sources to build your credit history. Information flows to the credit bureaus each month from companies where you have accounts.
Key sources credit reporting agencies collect data from:
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Creditors – Credit card issuers, banks, mortgage lenders, auto finance companies, retail stores, etc. provide detailed payment information on your accounts each month. Things like your payment due date, amount owed, whether you paid on time, or missed payments.
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Public records – Bankruptcy filings, tax liens, foreclosures, civil judgments and other financial records are collected from courthouses and government agencies.
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Collection agencies – Accounts turned over to collections are reported by collection agencies. The accounts show as past due.
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You – When you apply for credit or loans, you directly provide much of the personal data on your report like your birth date, address and Social Security number.
Not all creditors report to every credit bureau. But major credit card companies, banks, mortgage lenders, auto financiers and national retail chains typically report your account status and payment history to all three major bureaus.
How Credit Reports Help Lenders Make Loan Decisions
Lenders order your credit report from one or more credit bureaus when you apply for a loan. They closely evaluate the information to determine your creditworthiness and capacity to repay. Here are three key factors lenders consider:
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Payment history – Your track record of making monthly account payments on time. The most influential factor in your score. Late payments lower your score.
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Amounts owed – How much you owe compared to your credit limits. Higher balances hurt your score.
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Length of credit history – How long you’ve been managing credit accounts. A longer credit history is better for your score.
In addition to your credit report, most lenders will use a credit score when making a loan decision. Scores range from 300 to 850 and are based on the data in your credit report. A higher score signals to lenders that you are lower risk and more likely to repay the loan.
Many lenders have cut-off thresholds for credit scores. For example, you may need a minimum score of 620 to qualify for an auto loan or 720 for a mortgage. Borrowers with scores below those levels often face denials or higher interest rates.
How to Manage Your Credit Report
Since credit reporting agencies hold so much sway over your loan approvals, it’s essential to maintain a positive credit history. Here are some tips:
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Check your credit reports annually – Review all three of your credit reports for errors or inaccuracies that could hurt your score. You can get free reports annually from AnnualCreditReport.com.
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Pay bills on time – Payment history is the biggest factor affecting your scores. Pay all bills by the due date.
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Keep balances low – High balances compared to limits will lower your scores. Try to keep cards below 30% of the limit.
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Limit credit inquiries – Each application for new credit is recorded in your report. Too many inquiries in a short period can lower your scores. Only apply for credit you need.
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Correct errors – If you find mistakes on your credit reports, submit disputes to get them corrected promptly. Inaccuracies can drag down your scores.
Take steps to manage your credit history positively, and you’ll increase the likelihood credit reporting agencies provide favorable information to lenders when you apply for a loan. With strong credit reports and scores, you’re on the path to gaining the lender approval and financing you need.
Why doesn’t my report show a credit score?
While the law requires the credit bureaus to let you see the information in your credit reports, there is no such requirement for credit scores.
There are many types of credit scores, but the two main ones are FICO and its competitor VantageScore, which was developed jointly by the three main credit bureaus.
Scores are created by running the information in your credit reports through a mathematical formula designed to predict how likely you are to repay debt. Because the bureaus may have slightly different datasets, your scores may vary depending on which scoring model was used and whose data was used.
You can get a free credit score from many personal finance websites, such as NerdWallet, banks and credit card issuers.
Are credit scores from all major bureaus the same?
You may notice some variation in your credit score depending on which credit bureau’s data was used.
These differences exist because creditors report your payment history and other financial behaviors to the credit bureaus, but they don’t have to report to every bureau. So, one credit bureau might have more information than the other two, thus making your credit score different.
The main thing to take away is this: Your credit score will likely vary depending on whether it is based on data from Experian, Equifax or TransUnion. But that’s not a cause for alarm. The only cause for worry is if one bureau reports a score that is drastically different from the other two. Then, it’s time to check your credit reports for score-lowering errors and dispute them.
Credit Scores and Credit Reports Explained in One Minute
FAQ
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