Credit Reporting Agencies: What You Need To Know

IN THIS ARTICLE:

• Function of the Credit Bureaus
• How This Impacts Your Ability to Get a Loan
• How Credit Bureaus are Regulated to Protect You

The three major credit reporting entities -- Equifax, TransUnion and Experian -- are for-profit companies that are often called credit agencies or credit bureaus. Here's an overview of what these credit bureaus do, how they are regulated, and how their work directly impacts your ability to get a loan.

Function of the Credit Bureaus

Equifax, TransUnion and Experian compile information about you from all types of lenders, collection agencies, government offices, and other entities you pay bills to. They use this information to create your credit profile and score.

This profile and score change in real time based on mathematical models used by the three bureaus. For example, as you use your credit card in a given month, your balance relative to your credit limit changes, and as your credit card company reports this to the bureaus, it changes your credit score in real time -- by lowering your score as your balance gets closer to your limit.

If you pay your credit card on time or pay your balance monthly, your credit score maintains steady over time.

If you're late on any payments -- whether it's a credit card, mortgage, cable bill, parking ticket, medical bill, or city, state, or federal tax bill -- the entities you're late with inform the credit bureaus, which adversely impacts your credit score.

How This Impacts Your Ability to Get a Loan

Federal law requires mortgage lenders to check your credit history and scores when approving your loan. They do this by pulling your credit reports from Equifax, TransUnion and Experian.

The strength of your credit history determines whether you qualify for a mortgage, and your score determines the rate you'll get for a mortgage.

For example, if you had recent late payments on a credit card that reduced your credit score from 780 to 680, you'll still qualify for a mortgage with 20 percent down, but your rate will be as much as 0.375 percent higher with a 680 score than with a 780 score.

Late payments on any account will stay on your credit report for seven years from the date of the payment. The credit score impact is worst in the first two years, then your score starts to improve again.

This duration of other adverse items on your Equifax, TransUnion and Experian credit reports is similar:

• Inquiries from creditors you apply with stay on for two years.
• Judgments stay on seven years from the filing date of a paid judgment.
• Tax liens stay on seven years from the date the lien is paid.
• Bankruptcies stay on seven to 10 years depending on the bankruptcy type.
• Collection accounts stay on seven years from the late payment with the original creditor.

Looking for a local lender? Find one on Zillow

How Credit Bureaus are Regulated to Protect You

Being the source of this data for lenders -- for a mortgage or any other loan type -- gives Equifax, TransUnion and Experian a lot of power. The good news is that they're regulated to protect you.

The main body of laws regulating the bureaus are within the Fair Credit Reporting Act (FCRA), which was created in 1970 and updated with additional consumer protections in the late-1990s and early-2000s.

These consumer credit protection laws, which are enforced by the Consumer Financial Protection Bureau (CFPB), ensure that:

• You get a free credit report once per year. The government requires Equifax, TransUnion and Experian to maintain a site called AnnualCreditReport.com which is the only government-guaranteed source for this free report.
• You must be told if your credit history has been used against you (for example, to deny a loan).
• You can ask a creditor for your credit score. For example, your mortgage lender must disclose your credit score to you when you complete a formal application -- and it's worth noting here that AnnualCreditReport.com reports don't include credit scores.
• You can dispute incomplete, inaccurate or outdated information, and the bureaus must correct or delete inaccurate, incomplete, unverifiable or outdated information.
• You can request that your name be removed from marketing lists.