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Credit Reporting

What Is a credit bureau and why should you care?

You've heard of a credit bureau, but what does it really do? And why should you care?

You might picture credit bureaus as boring office buildings full of number crunchers in stuffy suits. Even if that's true, those suits could have a real impact on your financial life.

Credit bureaus can hold a lot of power when it comes to credit decisions. However, you have the real power—the way you handle your finances now can (not so) magically change the numbers you see from credit bureaus.

Let's break it down so you know what a credit bureau is and how it can affect your financial situation.

What is a credit bureau?

A credit bureau is essentially a data-collection agency that looks at all your credit information and assigns a credit score.

Credit bureaus put all your individual consumer data into a credit report—a nice, tidy package that showcases what you've been up to financially. They also tally up a credit score based on your individual credit activities, and that number can change quickly as new credit activities roll in.

Lenders and other organizations go to the credit bureaus to check up on you when you want something from them—when you apply for a loan or credit. That data can determine whether you're approved, how much you get, and what terms you receive.

Flawless credit? You're likely to get a larger loan amount with a better interest rate. If your credit is a little iffy, you're probably going to pay more or may not get approved at all.

The big 3

When it comes to general, nationwide credit bureaus, you primarily only have to worry about three—Experian, Equifax, and TransUnion. All private companies, these bureaus collect, use, and sell consumer data.

Although they all exist to do the same basic job, they do things a little differently, which is why your score might not be the same with all three. Each one has its own algorithm. Sometimes, some of your information isn't reported to all three agencies, which could also account for differences in your scores.

What you might not know is that dozens of other companies exist that also serve as consumer-reporting organizations. They're usually specialty data providers. They collect data relevant to employers, landlords, insurance companies, and other organizations that might want credit information to make a decision.

Is one credit bureau more important than the others?

Wondering who would win in a battle royale if Experian, Equifax, and TransUnion all piled into a ring? The conclusion would be pretty anticlimactic.

The truth is, none of the three are more important than the others. There isn't one that wields more power.

Lenders often use different credit bureaus when making a credit decision. They could use one or all three. You might not even know which credit bureau a lender or creditor uses to make their decision.

Plus, it's not just the credit score that goes into their decision. Every lender has its own guidelines. They may also look at things like how much money you make and what kind of assets you have in addition to your credit information.

How credit bureaus use your info

Credit bureaus use proprietary calculations to come up with a credit score for each person. Your credit score is a three-digit number falling somewhere between 300 and 850—typically the higher the better.

They collect new information about you constantly. Think of them as the popular kids who always have the latest gossip. Except in this case, the gossip includes all your latest financial moves.

Where does this gossip—er, data—come from? Credit bureaus get it straight from the source. Any company that you have credit or a loan with reports this information to the bureaus, usually on a monthly basis.

What personal info goes on your report?

Every credit bureau needs a way to identify you correctly. That starts with your legal name, address (current and past), birth date, Social Security number, and employer.

That personal information is necessary to create an accurate credit history. It ensures anything that ends up on your credit report is only and specifically your activity. Think about how many Jim Smiths there are in the world.

Now, imagine one of those Jim Smiths really likes to use his credit card—and he's not a fan of paying it back. If your name is also Jim Smith, you don't want the other Mr. Smith's bad spending habits to negatively affect you.

What factors do credit bureaus consider?

The bulk of what goes into your credit report depends on your financial activity. How do you use your accounts? How good are you at paying them back on time?

Things that factor into your credit report and score include:

  • Debt balances

  • Credit limits

  • Account standing

  • Date the account was opened

  • When an account closed

  • Payment history

  • Debt collection activity

  • Bankruptcies

  • Foreclosures

  • Judgments

  • Hard credit inquiries

What doesn't matter

Have a few skeletons in your closet? Some of those secrets are safe from the credit bureau. So is a lot of your personal information beyond your name, address, and birth date.

Lots of information stays off your credit report. Things they don't consider include:

  • Bank account balance

  • Interest rates

  • Education level

  • Criminal record

  • Gender

  • Race

  • Religion

  • Political affiliation

  • Medical history

  • Citizenship

  • Marital status

  • Transactions

  • Income

Why you should care what credit bureaus think about you

Need extra money? Whether it's a cash advance that helps you cover unknown expenses, a credit card, a loan, or another financial product, the lender often starts by pulling your credit report. It can affect other decisions, too.

All that activity you have on your report shows your financial patterns and habits. Maybe yours says you are responsible with money, you keep your balances low, and you always pay on time. That generally indicates to a lender that you’ll have a high credit score to match.

That information also tells the lender you're probably going to be responsible with the money they lend you. This may also indicate that you're considered a low risk for skipping out on your debt and they won't likely have to track you down just to get their money back.

Things like late payments, high balances, and bankruptcies paint a different picture. Listen, life happens, and your finances can sometimes take a hit due to factors beyond your control, whether it’s job loss, illness, having to take care of a family member, or emergency repairs on a house or car. But regardless, those past situations may make lenders a little nervous regarding credit approvals.

Lending decisions

Knowing what's on your credit report and improving the story it tells usually can provide you more financial freedom. You're more likely to both get approved and get better terms.

Your interest rate can affect things like the:

  • Loan amount.

    Even if you're approved, you might not get as much as you want, depending on your credit history. This can impact your ability to use the loan the way you want to. For instance, if a personal loan is too small to cover the project you want to do, you might have to scrap your plans.

  • Credit card limit.

    You could also face the same issue with credit cards. People with poor credit or high existing balances might be approved for a much lower credit card limit than someone with better credit.

  • Interest rate.

    Your credit history is a big factor in the interest rate you get on loans and credit cards. You can get rewarded for solid past financial decisions. If you've had a rocky financial past, you might still get approved, however, the lender will likely charge you a higher interest rate.

  • Down payment requirement.

    When you're trying to secure a loan, your credit could affect how much you need for your down payment. The lender could ask for a larger down payment to minimize their risk of you having subpar credit.

Insurance rates

Add insurance companies to the list of organizations that use your credit report as a deciding factor. It might not be for the reasons you think, though.

Sure, they want to know you'll pay your premiums. But they also use it to guess how good of a customer you'll potentially be.

If you have good credit, you could be considered to be more responsible and not as risky. You'll probably be less likely to have claims, especially expensive ones.

Your credit history could help determine your insurance rates. It won't be the only factor, though—your claims history, driving record, property value, and other factors could also matter, depending on what type of insurance you're getting. But credit can definitely be a factor they consider.

Housing decisions

Being denied a mortgage isn't the only way your credit can affect housing. Landlords and property management companies often use your credit score as a deciding factor in your rental application.

A low credit score could disqualify you from a property. Some landlords require a minimum score, or they might want a larger security deposit for a lower score. You might have the option to get approved with a co-signer under these circumstances.

Your credit history is usually only one factor in the decision. They also usually look at your income, rental history, criminal background, and employment history. Some landlords are also a little forgiving if you have a good reason for your credit blemishes.

Job offers

Your credit history can even impact your job prospects, as some companies pull a credit report before providing a job offer.

Credit checks are more common if the position deals with money or has access to top-secret company info. However, an employer can potentially do a credit check for any position.

Bad credit could especially be a red flag for positions that require you to work with money. If you are perceived as not being able to handle your finances, the company might not trust you with theirs.

Some companies might worry that you would try to steal from them if you're in financial distress. Late payments might also make them wonder how responsible you are.

Checking your credit report

Because your credit report has so much to do with your financial future, it's important to know what's on it. You can get a free copy of your credit report from once a year.

So, once you have it, what do you do with it? You can review everything on the report for accuracy and ensure it correctly reflects your financial accounts and personal information.

Here are mistakes to review on your credit report:

  • Misspellings

  • Incorrect personal information, such as your birth date and Social Security number

  • Accounts that aren't yours

  • Inaccurate details about accounts, such as the balance and payment status

  • Duplicate accounts

  • Incorrect account status

If you find errors on your credit report, you can contact the credit bureau directly. They usually offer dispute options online. You can also contact the creditor or lender directly to have them report your information correctly.

Getting your credit in order

Although you may not have direct interactions with credit bureaus, you will most likely feel the effects of what they do. Knowing both what a credit bureau does and how they come up with your credit score can be important when it comes to properly maintaining your financial health.

Credit bureaus may seem scary, but they don’t have to be. Regardless, it may be important to recognize that they do have some major pull when you want to open a credit card, get a loan, or even land your dream job.

If you’re just getting started on your credit-building journey or are looking to improve your score, the Varo Believe Card can be a good place to start. It's a worry-free way to build your credit¹ and eventually show the credit bureaus (and potential lenders) that you're responsible with your money.

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