How Credit Reports Work

How did all of this get started? In the very early days, when people bought things on credit at the general store, the store clerk wrote the purchase amount on a piece of paper that was then put into a "cuff." A cuff was a paper tube that they wore on their wrist.

Eventually, someone had the idea of collecting all of the information from these clerks' cuffs and putting it together for other merchants to refer to before granting credit. The problem was, they only collected the bad information. The data also included character references, employment information, insurance information, and even driving records. There was no verification that the information was correct, and the customer had no way of knowing where it was coming from. The only groups that could access the information were lenders and merchants. These were known as mutual protection societies and roundtables, and their scope was limited geographically. This soon proved to be an inefficient way for businesses to protect themselves from bad debt.

In the 1830s, the first third-party credit reporting agencies were established. They were one of the first businesses that were national in scope, and actually functioned much like a modern-day franchise. They were set up as a network of offices across the country.

They differed from "mutual protection societies" in that they allowed anyone to access the credit information -- for a price. These "branches" paid a percentage of their profits to their CRA central office in exchange for credit information from other locations. When the typewriter and carbon paper were developed in the 1870s, they discovered even greater efficiencies. The information that was accumulated was more widely available, more accurate, and covered a much larger geographical area.

These new CRAs had to deal effectively with four groups: their subscribers, the consumers and businesses about whom they reported, their branch office correspondents, and the general public. Learning to work effectively with and keep these groups happy, as well as competing with other CRAs, helped form the agencies we know today.

Information that makes up your credit report includes:

Things that don't appear on most credit reports include:

There are different versions of credit reports available depending upon the requestor. The consumer version includes all of the above information, as well as a listing of all inquiries for the report. The business version includes all of the above information, but only the inquiries made by companies with a "permissible purpose" -- this usually means someone with whom you have initiated business.

You've probably heard about a credit score as well. Don't confuse your credit score with your credit report. Credit scores are based on formulas that use the information in your report, but they are not a part of your report. Fair, Isaac and Company came up with a proprietary scoring formula that most creditors use, although there are other scoring methods that are used for various purposes. This score essentially boils down all of the information in your credit report to a single three-digit number. This gives creditors an easier way of making decisions about your creditworthiness. These numbers range from 300 to 850, with the higher number indicating a better credit risk. Read How Credit Scores Work to get the full scoop on how much a single number can affect your life.

Next, we look at how credit bureaus get information.

A credit bureau is a clearinghouse for credit information about consumers. There are more than 1,000 local and regional credit bureaus around the country that gather information about your credit habits directly from your creditors. Typically, these smaller local and regional bureaus are affiliated with one of three large national credit bureaus -- Equifax, Experian and TransUnion (see below).

For example, let's say you apply for a credit card and provide the card company with all of your personal information, such as your name and address, your previous address (if you haven't lived at your current residence for more than two years), your employer, other credit cards you have, etc. The credit card company then contacts a credit reporting agency (CRA) and reviews your credit report. If the company approves your application for a credit card, then the information you've supplied is forwarded to the CRA. That credit card company also reports your payment history to the CRA, so that becomes part of the report. The CRAs also access information about you from public record information such as court records.

All of the transactions you have that involve credit are reported monthly to CRAs by the merchants or creditors you deal with. Most large creditors report this information to all three national credit bureaus (CRAs). Some smaller lenders or merchants, however, may only report the information to one. For this reason, your report from each CRA may not be the same. You might get a copy of your report from Experian that does not include an account that shows up on your report that is maintained by TransUnion. For this reason, it is wise to review copies of all three reports.

You can find the contact information for all three national credit bureaus in the United States.

While the report itself only relays the history of your dealings with creditors, potential creditors can learn a lot from this. Read on to find out how professionals interpret your credit report.

As mentioned on the previous page, your credit report only relays the history of your dealings with creditors. However, you need to look closely. There's information there that may seem innocent to you but not to potential creditors. This includes information like:

Now, let's look at how you and others can access your credit report.

The Fair Credit Reporting Act (FCRA) specifies who can access your report and for what reasons. Your credit report can be viewed by people you have initiated business with, such as lenders, landlords, credit card companies and other businesses. Each of these groups must have a "permissible reason" to view your report, and their inquiries count as hard inquiries.

You can also give potential employers written permission to view your report. Because they're only trying to determine your integrity by seeing how you repay and manage your debts, they get a different version than lenders get.

Companies can also get your name and address from credit bureaus in order to send you offers for pre-approved credit cards in the mail or via a dinner-time telemarketing call. These companies don't actually get a copy of or even see your credit report. They have a set of criteria that they use to screen consumers in order to come up with a list of potential customers. They use these lists for their marketing efforts. These inquiries are considered soft inquiries and do not show up on any version of the report except for the version you get. If you don't want to have your name sold to these companies, you can "opt out" by either writing to the three major credit bureaus or by calling 888-5-OPTOUT (888-567-8688). This will remove your name for two years from mailing and telemarketing lists that come from TransUnion, Equifax, Experian, and INNOVIS.

You can (and should) request copies of your report from the three major credit bureaus regularly so you can correct any inaccuracies. According to a 1998 study, "Mistakes Do Happen," conducted by the Public Interest Research Group, 29 percent of consumer credit reports had errors serious enough to cause denial of credit, insurance, etc. The Consumers Union, which publishes Consumer Reports, did a study with similar results. However, the Associated Credit Bureaus (now the Consumer Data Industry Association) sponsored its own study in 1991, and this study reported that less than two-tenths of 1 percent of credit reports contained incorrect information.

As you can see, reviewing your credit report is a good idea. A copy of your report costs $10 plus any taxes, shipping and/or handling charges. You are are entitled to a free copy of your credit report once every 12 months.

The cost of the report is regulated by the Federal Trade Commission as part of the Fair Credit Reporting Act. The FTC usually reviews the cost annually and may increase it to stay in line with inflation. That price limit was increased to $10 in 2005.

The Federal Trade Commission's Fair Credit Reporting Act (FCRA) was put into effect in 1971 to protect consumer rights. The FCRA is the federal law that regulates credit reporting companies. It specifies consumer rights to review the information and contest inaccuracies, as well as defines who can access the reports and for what reasons.

What are your rights under the FCRA?

As a consumer, you have certain rights when it comes to how your credit history is maintained and used. The consumer reporting agencies that collect and maintain this information must abide by rules set up by the FCRA. These include:

What if your name is Bob Jones, and when you get your credit report from one of the credit bureaus you find that there are accounts listed there that are held by another Bob Jones? Or, you find that your unemployed and debt-heavy brother's information is showing up on your report? What do you do? Under the FCRA, you have the right to, and the CRA has the responsibility of, correcting any errors or incomplete information in your credit report.

Listed below are some steps you can take to correct errors on your report. Whatever you do, don't use one of those companies that say they can "fix" your credit history -- erase bankruptcies, liens, bad credit, etc. While there are some legitimate companies out there that can help you, you can do anything they can do.

One very important thing is to document everything you do (dates and times of phone calls, people you spoke with, what they said, what your action was, etc.), and keep copies of everything you send them. Don't send original documents -- send copies. Remember to be aggressive and persistent. This process may take a while -- usually three to six months.

If you can't get any satisfaction and feel you're not being treated fairly by the creditor, you can contact the agency to which they report. Credit InfoCenter has a page that lists this contact information.

For more information on credit reports and related topics, check out the links on the following page.