People talk a lot about credit bureaus. What do they do? How do they differ? And why are there three of them? (Actually, there are a lot more than that, but it’s mainly a certain trio that affects most consumers’ lives.) Let’s take a closer look at these entities, what they do, and how they do it.
- The three credit reporting agencies are TransUnion, Equifax, and Experian.
- Because of their reporting methods, it is common to have different credit scores across all three bureaus.
- In order to get the best loan terms available, you should bring all three credit scores to your loan appointment.
- Credit rating agencies are different from credit reporting bureaus. Credit ratings assess a company or country’s ability to repay a loan, while credit reporting determines an individual’s credit score.
What Are Credit Bureaus?
Credit bureaus package and analyze consumer credit reports from which credit scores are derived. Credit scores are issued as three-digit numbers, typically between 300 and 850, and they impact the size of a loan you can qualify for, the interest rate you pay on that loan or on a credit card, and sometimes even your renting and employment opportunities.
Credit bureaus are private companies that are highly regulated under the Fair Credit Reporting Act (FCRA). They are limited in how they collect, disburse, and disclose consumer information and have come under increased scrutiny since the Great Recession of 2007-2009.
One interesting feature of the credit bureau business model is how information is exchanged. Banks, financing companies, retailers, and landlords send consumer credit information to the credit bureaus for free, and the credit bureaus turn around and sell consumer information right back to them.
The Big Three Credit Bureaus
In the U.S. there are several different credit bureaus, but only three that are of major national significance: Equifax, Experian, and TransUnion. This trio dominates the market for collecting, analyzing, and disbursing information about consumers in the credit markets.
In the U.S. there are several different consumer reporting agencies, but only three that are of major national significance: Equifax, Experian, and TransUnion. This trio dominates the market for collecting, analyzing, and disbursing information about consumers in the credit markets.
Credit scores have historically been based on the FICO score associated with the data-analytic company originally known as the Fair Isaac Corporation. While you can still get a FICO score from any of the big three, their calculation methods differ, and Experian uses its own FICO score, also known as “Experian/Fair Isaac Risk Model v2.”
Based in Atlanta, Equifax has approximately 11,000 employees and “operates or has investments in 24 countries”: Argentina, Australia, Brazil, Cambodia, Canada, Chile, Costa Rica, Ecuador, El Salvador, Honduras, India, Malaysia, Mexico, New Zealand, Paraguay, Peru, Portugal, Russia, Saudi Arabia, Singapore, Spain, the U.K., the U.S., and Uruguay. Especially dominant in the U.S. South and Midwest, it claims to be the market leader in most of the countries in which it has a presence.
With domestic headquarters in Costa Mesa, Calif., Experian originally handled reports for the Western United States. Now it promotes itself as “the leading global information services company.” The firm employs “approximately 17,000 people in 37 countries” and has its corporate headquarters in Dublin, Ireland, with operational headquarters in Nottingham, U.K., and São Paulo, Brazil.
Marketing itself as “a global information and insights company that makes trust possible,” the Chicago-based TransUnion has regional offices in Hong Kong, India, Canada, South Africa, Colombia, the U.K., and Brazil and employs more than 8,000 people.
Similar Processes, Yet Different
All three credit bureaus collect the same type of information about consumers. This includes personal data, such as name, address, Social Security number, and date of birth. It also includes credit history, including debts, payment history, and credit application activity. It is common practice for the credit bureaus to collect information from federal and private student loans and housing lenders.
If you are delinquent in making student loan payments, Sallie Mae can report you to a credit bureau—typically after the 45-day mark. Federal loans provide more leeway, allowing 90 days to pass before filing a report.
The Internal Revenue Service (IRS) doesn’t report overdue income tax to the bureaus. However, if a taxpayer does not repay their tax debt in a reasonable amount of time, or if they owe a lot of back taxes, the IRS might file a federal tax lien (a legal claim against a taxpayer’s property) with the local county clerk’s office. A tax lien filing is considered public information, and the bureaus can find it through third-party research.
Each credit bureau uses information on consumers to develop credit reports and calculate credit scores. The higher the score, the lower the credit risk a consumer is deemed to be—and the higher their creditworthiness.
Two of the biggest companies when it comes to credit scoring models are Fair Isaac Corporation (FICO) and VantageScore. VantageScore is the result of a collaboration between the three nationwide credit bureaus: Equifax, Experian, and TransUnion. Each of the credit unions has built its own FICO models specific to different types of lending.
While FICO 8 is commonly used across all bureaus to assess general creditworthiness, each bureau has a different model for different types of lending. For example, Experian developed FICO 2, Equifax uses their FICO 5, and TransUnion has their own version in FICO 4.
Why Credit Scores Differ
Suppose you apply for a loan, line of credit, or credit card from a lender. That lender almost certainly performs a credit check, requesting that a report on you be run from at least one of the three major credit bureaus. However, it does not have to use all three. The lender might have a preferred relationship or value one credit scoring or reporting system over the other two. All credit inquiries are noted on your credit report, but they only show up for the bureaus whose reports are pulled. For example, if a credit inquiry is only sent to Experian, then Equifax and TransUnion do not know about it.
Similarly, not all lenders report credit activity to each credit bureau, so a credit report from one company can differ from another. Lenders that do report to all three agencies may see their data appear on credit reports at different times simply because each bureau compiles data at different times of the month.
Delinquency generally doesn’t affect your credit score until at least 45 days have passed.
Most lenders examine just one report from a single credit bureau to determine an applicant’s creditworthiness. The major exception is a mortgage company. A mortgage lender examines reports from all three credit bureaus because such large amounts of money per consumer are involved. It often bases the approval or denial on the middle score.
The bureaus’ scoring systems are not set in stone. Each of the methodologies (including FICO) has undergone changes throughout the years as part of ongoing efforts to improve accuracy. It is very possible for your credit score to change over time with the same bureau even if your debt history hasn’t, simply because the scoring method has been tweaked.
Do You Need All Three Scores?
Yes. Credit information is often not reported with the same accuracy across all three credit bureaus, so it is important for consumers to check each report and score. Under the 2003 Fair and Accurate Credit Transactions Act (FACTA), an amendment to the above-mentioned FCRA, consumers are able to receive a free copy of their report from each credit reporting agency once a year.
As some creditors and collectors only report to one or two agencies, some items get disputed off one report but are verified on another. Items also get removed from one or two reports for various reasons. This variation often means a large credit score difference from bureau to bureau. When a credit score is requested, it is calculated based on what is in that particular credit report. Thus, while a consumer may have a solid credit score based on one report, they may have a dicier credit score based on another.
If a consumer is denied credit based on one bad credit score but has a better credit score with another bureau, they may have luck calling the creditor and asking for the better score to be considered, especially if there is a good reason why the first credit score is so low.
Credit Rating Agencies vs. Credit Bureaus
It’s easy to confuse credit bureaus with credit rating agencies, especially as credit bureaus are also called credit reporting agencies. However, credit rating agencies deal with companies and corporations, not with individuals. They arose out of the need for investors to compare the risk-reward potential of certain investments and as a way to gain insight into the financial stability of companies looking to borrow money by issuing bonds or preferred stocks.
There are three major credit rating agencies: Fitch Ratings, Moody’s, and S&P Global. These agencies research and analyze a firm’s financials and assign the company a corporate credit rating. Different from credit reports or credit scores, these ratings are intended to provide investors with information about companies and the issuers of debt-based investments. The agencies also rate the particular debt obligations and fixed-income securities the companies issue, as well as insurance companies for financial solvency.
Credit ratings are issued in letters, such as AAA or CCC, so that investors are able to quickly look at a debt instrument and gauge its risk. The ratings differ among the three major agencies, so it is important to understand which one is providing the letters. Credit ratings are based on a huge number of variables and involve some market-based, historically estimated, firm-level information. Assessments range from business attributes to underlying investments, and all are designed to offer a picture of the likelihood that a borrower will be repaid.