Purpose of Credit Bureaus

A credit bureau, or credit reporting agency, provides the first introduction between you and potential lenders, insurance agencies, employers and landlords. The primary purpose of the credit bureau is to provide insight into your character and your creditworthiness. The credit bureau accumulates this information from companies that you have---current or prior---credit relationships with. In addition to your credit history, a credit bureau will also provide any information from government agencies and other public records (i.e. collections, bankruptcy, convictions).

Identification

Every consumer has a credit report. You can think of your credit report as your financial fingerprint because it is distinctly yours and it originates the minute you use credit. The information that a credit bureau acquires from your credit relationships will serve as the foundation of your credit report. However, your credit report does not just stop at financial information; it will also contain all of your past dwellings and employers. (See Resources.)

Types

There are three major credit reporting agencies used, TransUnion, Experian and Equifax. When your credit report is pulled by someone who needs to determine how creditworthy you are, he will consider all of the information in the report, but the credit decision will weigh heavily on your FICO score.

Significance

Your FICO score is a three-digit number that may range from 350-850. The higher your FICO score, the lower your credit risk; vice versa for a low score. A FICO score is a credit rating system create by the Fair Isaac Corporation. All three of the major credit bureaus use a credit ranking system created by FICO. However, each agency calls it a different name. For example, Equifax uses the Beacon Score; TransUnion uses Empirica, and Experian uses the FICO system called the Fair Isaac Risk Model.

Considerations

In 2006, the three major credit reporting agencies created their own credit rating system called "Vantage Score." The agencies felt there was a need for a more unified scoring system because a consumer may have a different FICO score for each credit reporting agency, which can result in a consumer being unfairly denied credit or being extended credit he doesn't deserve. However, the FICO is still the most widely used.

Effects

There are five major categories that impact your FICO score. Your payment history is the biggest, which accounts for 35 percent. Thirty percent of your score is derived from your utilization, or credit-to-debt ratio. Basically, it is the amount of credit still available to you. For example, if you have a credit card with a $500 limit, but you have only $250 of available credit, your utilization would be 50 percent. The third category, 15 percent, is your credit history---the longer you've had credit, the better this category will be. The last two categories account for 10 percent each; they are any new credit and credit inquiries.