Love them or hate them, credit reports have a massive amount of influence over your life. Your credit reports are used when you apply for a mortgage, auto loan, credit card, apartment, a job, a mobile phone, public utilities, insurance coverage… the list goes on and on. It’s next to impossible to apply for a service or an extension of credit without your credit reports being part of the screening or underwriting process.
As much as you might like to change or avoid the system, the fact of the matter remains that your credit reports are used to help others make decisions about you. Lenders, employers, collection agencies, landlords, insurance companies, and even car rental companies rely on credit reports to guide them in their day-to-day dealings with consumers. Your current lenders can even access your credit reports to determine whether or not they wish to continue doing business with you, and under what terms. It may sound harsh but the cold hard truth is that if you ignore the importance of maintaining clean credit you will suffer the consequences.
Where It All Began
Now that we’ve touched on the importance of your credit reports, here is a look at where the information on your credit reports comes from and how your credit reports are built. Most people are familiar with the names of the three major credit reporting agencies – Equifax, Trans Union, and Experian. These companies are commonly referred to as the “Big 3” or “CRAs” (for Credit Reporting Agencies) However, once upon a time credit reporting was not nearly as centralized of a process.
Before the existence of the Big 3 there were hundreds of smaller credit reporting agencies. These agencies were local and were generally referred to as merchants associations. Local businesses and service providers would report the payment history of their customers to these small local merchants associations. Then, other businesses and service providers could consult these records when a new customer applied for financing in order to help the businesses make more informed decisions before granting new credit.
Through acquisitions and mergers these smaller merchants associations slowly began to gobble each other up and their databases began to grow so that they covered much larger areas of the country. Eventually, the Big 3 came to dominate the credit reporting market as they still do today. Yes, some smaller credit reporting agencies still exist but the majority of lenders almost exclusively rely on credit reports from Equifax, Trans Union, and/or Experian.
Credit reports do not create themselves. There is a detailed and complex process taking place behind the scenes which enables lenders to access and review your credit history with a few keystrokes. In order to understand the credit reporting process it is best to begin by first taking a look at the players involved in compiling and delivering your credit reports.
1. The Credit Reporting Agencies (CRAs)
While Equifax, Trans Union, and Experian all do essentially the same things, it’s important to understand that they are competitors and not partners, as many consumers incorrectly believe. They do not share an infrastructure or share their data and no, they are not government agencies.
The CRAs compile and maintain their own individual credit file databases. Each CRA has over 200 million consumer credit files.The information contained in these files is likely similar across the board, but certainly not identical. As a result, if you pull a separate credit report directly from each, you’ll probably find some differences between the reports. These differences commonly include things like as missing accounts, different account information, different payment histories on specific accounts, inconsistent addresses, and so on. The differences between your three credit reports are part of the why you also have three different credit scores.
2. The Data Furnishers (DFs)
The information housed by each of the CRAs generally (though not always) comes from lenders and collection agencies, referred to in the credit reporting world as data furnishers. Data furnishers supply the CRAs with information regarding your account management history and that information is used to help create your credit reports.
The data furnishers provide this information to the CRAs at no cost, so the CRAs do not pay data furnishers for your information. The information is given to them free and voluntarily. Furthermore, these data furnishers will actually turn around and buy this same information back from the CRAs for a fee in order to access your credit reports. It’s certainly a strange business model.