The Credit Report

Credit rating agencies, also called credit bureaus or consumer reporting agencies, are for-profit companies that maintain credit information to produce credit reports and calculate credit scores for nearly every adult in the United States. There are three main agencies in the United States that dominate the market: TransUnion, Equifax, and Experion.

Credit bureaus collect information about consumers’ financial activity, compile that information into a report, calculate a credit score, and then sell that information to banks, mortgage lenders, department stores, car financing companies, employers, and any other entity who is enquiring about an applicant’s credit background. Although credit reporting agencies collect consumer credit data, they do not make any credit decisions. Rather, creditors use the credit reports and credit scores created by the credit bureaus, to supplement information provided by applicants, to make decisions about granting credit, approving and pricing insurance, renting or mortgage lending for housing, hiring, issuing credit cards, and other purposes.

There are many components to personal credit and a person’s financial life, and these are captured in their credit report. A person’s credit file is important because it determines if they can borrow money and if so, what they will have to pay for it and how quickly they will need to repay it. This means the monthly mortgage payment a person makes is directly related to their credit score, as is their monthly credit card payment, and their auto insurance premium, and other loans and credit payments.

A person’s credit profile is an indicator to lenders, also called creditors, of how high a risk they are in terms of the likelihood that they will repay the money they borrow within the terms of the agreement. Meaning, will they pay on time. If an installment loan requires a monthly payment, but the borrower only pays every other month, that hurts their credit profile, even if at the end of the year they paid the same amount they would have paid if they had paid on time. What’s important is paying on time and the credit report gives lenders a clue about whether or not the applicant is likely to live up to the terms of the agreement. A person’s credit history demonstrates their behavior. Therefore, lenders use credit report data to learn about applicants financial lives and assess their creditworthiness in combination with other factors.

In combination with credit history data, lenders often use what is called “The Three Cs of Credit” when evaluating the creditworthiness of applicants. The three Cs are: character, capacity, and collateral (some use the word capital instead of collateral.)