How Does the Credit Bureau Know My Income to Compare to My Debt?

Credit reports contain information pertaining to the credit utilization of consumers. Credit or FICO scores are not affected by debt-to-income ratios. Credit bureaus gather consumer information and keep records of employment history, but not wages. Lenders gather income information directly from consumers on credit applications and compare it with credit reports to determine debt-to-income ratios.

History

Equifax began gathering consumer information in 1913. TransUnion became the second major credit reporting agency in 1968 and Experian became the third in 1996. Fair Isaac Company and Equifax established credit or FICO scores in 1989 to rate borrowers' creditworthiness. In the 1990s Experian and TransUnion began using the FICO scoring system. In 2000, Experian started its own scoring system and in 2003 it made credit reports available to consumers. FICO began allowing consumers to view credit reports created by TransUnion and Equifax in 2003.

Benefits

Credit scores offer lenders a standardized formula by which to ascertain the creditworthiness of loan applicants. Credit scores enable banks to set benchmarks on which to base underwriting guidelines. Using historical payment history data, lenders can hedge risks in lending by estimating the likelihood of borrowers defaulting on loans. Consumers who use credit responsibly benefit from credit score-based pricing on products ranging from car loans to credit cards.

Time Frame

Lenders provide the major credit bureaus with monthly updates that detail credit utilization, payments and existing loan balances. When borrowers are more than 30 days late with a payment, the lender notifies the credit bureau and the late payment remains on the credit report for up to seven years. When consumers notify the credit bureaus of errors on their report, the bureaus investigate claims within 30 days and corrections are made within 90 days.

Considerations

Payment history is the most significant factor used in credit reports and accounts for 35 percent of the FICO score. Thirty percent of the FICO score is comprised of the ratio of outstanding balances relative to available credit. Lower credit utilization leads to higher scores. Length of credit history accounts for 15 percent of the score and types of credit and new credit, which includes the number of credit inquiries, each account for 10 percent.

Effects

When banks calculate debt-to-income ratios, they calculate the total amount of all the monthly payments on a credit report and divide it into the applicant's gross monthly income. Most lenders allow maximum DTI ratios of 41 percent for mortgages and between 30 and 40 percent for other types of loans. Home equity lines of credit with no balances are reported on credit reports; banks calculate what the monthly payment would be if the line was maxed out and use that figure as part of the DTI equation.