How Do Credit Reports Work?

The information in your credit report can help you buy a house -- or it can prevent you from doing so. It can get your application for a credit card accepted or rejected. It can make a difference in getting the apartment you want, the car you want and the job you want. That's why it's so important to understand how credit reports work.

Credit Bureaus

In the United States, three major companies produce credit reports: Equifax, Experian and TransUnion. These companies, called credit bureaus, collect a range of information on tens of millions of people and assemble that information into reports, which they sell to lenders, employers and others. Federal law requires each bureau to provide you with a free copy of your credit report once a year, although you have to request it at a special website, AnnualCreditReport.com.

Information Collection

The bureaus collect four basic types of data. The first is identifying information: your name and birth date, your Social Security number, the addresses where you've lived, and possibly your current and past employers. The second category is credit information, which usually makes up the bulk of the report. It includes all credit accounts in your name, each of which is listed with the type of account (credit card, mortgage, student loan, and so on); when you opened it; the credit limit, if applicable; the balance; and your payment history. The third category, public record information, includes bankruptcies, foreclosures, tax liens and other legal proceedings. The final category is credit inquiries -- a list of everyone who has requested a copy of your credit report in the past two years.

Distributions

According to the Federal Reserve Bank of San Francisco's consumer information office, the bureaus can provide your credit report to companies with whom you have credit accounts, or that are considering offering you credit; employers or potential employers; insurance companies with which you are doing business; government agencies; and any other person or organization with a "legitimate business need" to see the report -- a landlord or business partner, for example. The bureaus will also supply reports in response to a court order, or to anyone whom you have given written authorization to see your report.

Scoring

Credit reports do not make any kind of a recommendation on whether a lender should extend you credit, an employer should hire you or a landlord should rent to you. The reports simply give them information that they can use to come to their own conclusion. However, the bureaus use the information in your report to compute a "credit score," which boils your credit history down to a number that, in the most commonly used system, ranges from 300 (horrible) to 850 (out-of-this-world good). Although credit bureaus must provide you with your report for free, you'll have to pay to see your score.

Other Details

All information stays on your report for seven years, although bankruptcy can remain on a report for up to 10 years. If you discover an error in your credit report, contact the particular bureau that prepared the report. The bureau will investigate, and if it agrees with you, it will correct the information and, at your request, send out corrected reports to people and businesses that have accessed your credit report. Even if the bureau decides that the information is correct, you have the right to put a short statement in your report disputing the information.