How Credit Reports Work

Not monitoring your credit report can lead to excessive debt and additional fees. See more pictures of debt.




If you've ever applied for a credit card, a loan to buy a house or car, or a line of credit to make some other large purchase, then you've probably had your credit report reviewed by the lender. If your report says you don't pay your bills on time, or that you have a lot of debt, you may not get that loan -- or you may get it but have to pay a higher interest rate. Because it can have such an impact on the things you do in your life, you should make sure that your credit report is accurate and that you understand how it affects the credit you can get.

In this article, we'll take a look at what goes into a credit report, who puts it there, and who can get access to it. We'll also find out how all of that information is compiled into a single document that can have a pretty big impact on your life.

A credit report is an accumulation of information about how you pay your bills and repay loans, how much credit you have available, what your monthly debts are, and other types of information that can help a potential lender decide whether you are a good credit risk or a bad credit risk.

The report itself does not say whether you are a good or bad credit risk -- it provides lenders with the data to make the decision themselves. Credit bureaus, also known as credit reporting agencies (CRAs), collect this information from merchants, lenders, landlords, etc., and then sell the report to businesses so they can evaluate your application for credit. Lenders make their decisions based on different criteria, so having all of the information helps them ensure that they are making the right decision.­­


Credit Reports Yesterday and Today

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:

  • Personal identifying information - This includes your name, address (current and previous), social security number, telephone number, birth date, your current and previous employers, and (on the version you get) your spouse's name may be included as well.
  • Credit history - This section includes your bill-paying history with banks, retail stores, finance companies, mortgage companies, and others who have granted you credit. It includes information about each account you have, such as when it was opened, what type of account it is, how much credit it includes (or the amount of the loan), what your monthly payment is, etc. If you've closed the account or the loan has been paid off, then that information shows up as well. If there were missed or late payments, this is where that appears.
  • Public records - Information that might indicate your credit worthiness, such as tax liens, court judgments and bankruptcies. This information is readily available from public records.
  • Report inquiries - This section includes all credit granters who have received a copy of your credit report. It also includes any others who were authorized to view it. In addition, lists of companies that have received your name and address in order to offer you credit are included. These companies don't actually see your report, but get your name if you meet their criteria for an offer of credit, insurance or other product. This is where all of those "pre-approved" credit card offers come from.
  • Dispute statements - The report may also include any statements you've made disputing information on the report. Most credit bureaus allow both the consumer and the creditor to make statements to report what happened if there is a dispute about something on the report.

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

  • Bank account balances
  • Race
  • Religion
  • Health (although medical bills may show up as debts)
  • Criminal records
  • Income
  • Driving records

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.


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.

  • To order your report, call: 800-685-1111 or write: P.O. Box 740241, Atlanta, GA 30374-0241 To report fraud, call: 800-525-6285/ TDD: 800-255-0056 and write: P.O. Box 740241, Atlanta, GA 30374-0241
  • Experian – To order your report, call: 888-EXPERIAN (397-3742) or write: P.O. Box 2104, Allen, TX 75013 To report fraud, call: 888-EXPERIAN (397-3742)/ TDD: 800-972-0322 and write: P.O. Box 9532, Allen, TX 75013
  • To order your report, call: 800-916-8800 or write: P.O. Box 1000, Chester, PA 19022 To report fraud, call: 800-680-7289/ TDD: 877-553-7803 and write: Fraud Victim Assistance Division, P.O. Box 6790, Fullerton, CA 92634-6790

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.


How Lenders 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:

  • Inquiries - Every time you apply for a credit card to get a free travel mug, duffel bag, or T-shirt, you are adding another hard inquiry to your credit report. When potential lenders see these inquiries, it may wrongly imply that you're either in some financial situation where you need a lot of credit, or are planning to take on a large debt. Either can flag you as a high credit risk. Other types of inquiries, such as your own requests to view the report, employer requests to view the report and requests by marketers to get your name in order to sell you something, count as soft inquiries. These inquiries don't show up on the reports that lenders see, and therefore don't affect how they view your credit. Also, watch out when you are car shopping or mortgage shopping. Make sure you don't let the car dealer or mortgage broker run your credit unless you know you're going to be buying from them. While the FCRA allows these types of multiple credit inquiries that are within seven to 14 days of each other to be counted as a single inquiry, you would have to be careful of your timing to make sure you don't have multiple inquiries show up. So, how many hard inquiries can you have without a problem? Some experts say that if you have 10 credit card inquiries in six months, that will probably scare a lender. Others experts say that as few as six credit card inquiries in six months can label you as risky. Inquiries that are older than six months may not be looked at as strongly because if you actually set up the loan or opened the credit card account, those accounts would now be showing up on your report as well. The newer inquiries might lead the lender to think that you actually have the credit accounts available now but they haven't shown up on the credit report yet. Most inquiries drop off of your report after two years.
  • Open credit accounts - Another thing to watch out for as you gather all of those free mugs and duffel bags is that even though you may have forgotten about them, accounts you don't use still count toward your total available credit. Just as with the hard inquiries we've talked about, these can indicate to a potential lender that you could easily put yourself into financial danger with all of that readily available credit. According to TransUnion and Experian, you should not close out your oldest card, because it has the most history on it; also, you should maintain four to six credit cards to "keep your credit score and debt balances healthy" [source: TransUnion]. But other than that, close the accounts you don't use. In addition to avoiding excessive available credit, you're limiting your exposure to identity theft. Cutting up the card or just not using it doesn't mean the account is closed. You have to call or write to the card company and ask to close the account.
  • Missed payments - Obviously, your payment history makes a big difference. You should always make at least the minimum payment, or consolidate accounts to reduce your payments. These delinquencies stay on your report for seven years -- even if you've caught up your payments! The same goes for accounts that creditors have turned over to collection agencies or charged-off -- meaning that they've written the account off as a loss. Even if you do pay off the account at a later date, the charge-off or collection action stays on your report for seven years.
  • Maxed-out credit lines - Another thing that scares lenders is a maxed-out credit line (or two). This waves a big red flag and indicates that you may be financially strapped for some reason. Some experts suggest moving debt around if this is the case. For example, if you have a maxed-out card but have other cards that haven't reached their credit limits, you might consider moving some of the debt from the maxed-out card to the non-maxed-out ones.
  • Debt in relation to income - If you have unsecured credit card debt that is more than 20 percent of your annual income, lenders may not want to give you the best deal on a loan -- if they'll take the chance and give you a loan in the first place. Work to reduce the debt-to-income ratio and you'll be able to get better rates on the loans you seek.

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


Access to Credit Reports

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:

  • Report access - Only those who have a "permissible purpose" can access your report. This means that only people with whom you've established a business relationship, such as a lender, credit card company, landlord, insurer, employer, etc. can access your report.
  • Written consent - For reports that are given to employers or potential employers, written consent is required. Also, no medical information can be reported to anyone without your written consent.
  • Personal access - You have the right to get a copy of your report and a list of everyone who has accessed it. The law also sets a maximum charge for the report, which is $10 as of 2005. You are entitled to a free copy once every 12 months. These circumstances include: unemployment, welfare, fraud, or if you've been denied credit because of something in your report. In most cases, you have to request your report within 60 days of the given circumstance.
  • Credit denial - If you are denied credit or employment (or some other service or product you were seeking) as a result of something in your credit report, then the person who denied you has to tell you why and how to contact the credit bureau that provided the information.
  • Dispute inaccuracies - If you find that your report has inaccurate information, then you can dispute the information and the CRA has to reinvestigate it within 30 days. Until it is proven accurate, they cannot put the disputed information on the report unless they include your written statement of dispute along with it. If you prove that the information is inaccurate, then it has to be removed from the report permanently within 30 days. It is then the responsibility of the national CRA you are dealing with to inform the other national credit reporting agencies of the error.
  • Outdated information - In most cases, negative information stays on your report for seven years. Bankruptcy information stays on for 10 years.
  • Removing your name from marketing lists - You have the right have your name removed from lists that credit reporting agencies sell to marketers.
  • Seek damages - If someone accesses your report without "permissible purpose" or without your written permission, or violates one of the other specifications of the FCRA, then you can sue for damages.


Fixing Errors on a Credit Report

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.

  • Let the paperwork begin - You will begin a long and often arduous task of writing letters explaining the inaccuracies. First, send a letter to the CRA to give your side of the story and try to set straight the inaccuracies that have been reported. The letter should include your name and address and explain what is inaccurate and why. Tell them the facts and request a correction to your report. It would also help to include a copy of your report with the incorrect information circled, along with copies of any documentation that supports your claim. Send your letter by certified mail with a return receipt so you know it was received. Keep a record of everything you sent. Second, send a letter to the merchant or creditor who supplied the incorrect information to make it known that you are disputing it. Send copies of the documentation that supports your claim, just as you did with the CRA. (NOTE: Most of the national credit bureaus allow you to begin the dispute process online. This isn't a bad place to start; but if you have additional documentation, presenting it the good old fashioned way is probably best.)
  • Give the CRA 30 days - The credit reporting agency legally has 30 days to investigate your claim (unless your claim is deemed "frivolous" or "irrelevant"). If after this amount of time you haven't heard back, call the customer service department. There is usually a toll-free number on the credit report that you can call for assistance. Remember to keep notes of your conversations and any actions that were taken as a result.
  • Re-reviewing your credit report - When you get a written response from the credit agency, you'll also get a new copy of your credit report (if there were any changes). If any information is changed on the report, the CRA cannot change it back unless the creditor provides proof that it was accurate. In this case, you will get notification from the CRA that the item has been put back on your report. You'll receive the contact information for the creditor or merchant so you can begin your battle (if you know you're right). Like we said at the beginning, be aggressive and persistent. Find out the creditor's side of the story. See below to find out what to do if they're right and you're wrong.

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.