There are three major consumer credit reporting bureaus – Equifax, Experian and TransUnion. These are three separate agencies, but they are all in the business of collecting and reporting consumer credit information. Lenders, credit card companies, insurers, landlords and utility companies all use the information provided by these agencies to make decisions about your creditworthiness as a borrower or customer.
The credit bureaus keep an invisible paper trail of all of your account activity when it comes to credit and loans. When you make a payment on your credit card, or open a new account, this information is reported to the credit bureaus and added to your credit report. If you default on an account, or if you are habitually late on your payments, that is reported to the credit bureaus as well. Your three digit credit score is a summarization of the information on your credit report, and helps lenders to see at a glance what sort of history you have had with credit.
In addition to collecting information, the credit bureaus distribute information as well. When you apply for a mortgage or an auto loan, for example, the lender will contact one or more of the three credit bureaus to inquire about your credit history before making a decision. This inquiry, too, becomes part of your credit report, and is known as a “hard inquiry.” “Hard inquiries” are inquiries that come from a lender who is inquiring for the specific purpose of extending you credit. When you check your own score, it is a “soft inquiry” and does not count against you. Numerous hard inquiries, however, can have a negative impact on your score because it indicates that you are a distressed borrower who is desperate for more credit.
The three major credit bureaus provide an important financial service for lenders and consumers, and if you can understand how they work, they can help you improve your financial profile.