What Is The Main Purpose Of A Credit Bureau?
Credit bureaus -- including Experian, TransUnion, and Equifax -- gather information to inform institutions if you are financially stable and trustworthy. Discover how and why with this guide.
Whether you know it or not, you’ve used one of the big three credit bureaus (Experian, TransUnion, and Equifax) when applying for a small business loan, looking for a new place to live, applying for a job, or just receiving your credit report or credit score.
But, what do these companies even do? How do they use and collect your information? When will you need to use them?
Table of Contents
What Is A Credit Bureau?
A credit bureau is a business organization that collects and sells data regarding the credit history of individuals. They typically collect data such as your credit card and loan balances, the number of credit accounts you have, your payment history, any bankruptcies, etc. Today, there are dozens of credit bureaus, but the “big three” — as they are known — are Equifax, Experian, and TransUnion.
Credit bureaus are also called credit reporting agencies.
How Do Credit Bureau Companies Collect My Information?
Okay, we admit it all sounds a bit creepy. Big Brother’s always watching, right? Well, yes, but it might comfort you to know how credit bureaus collect and share your information.
Credit bureaus mainly collect information from credit institutions with which you already have a relationship, such as:
- Credit card companies
- Student loan providers
- Auto loan providers
Credit bureaus do not have access to these accounts; instead, the credit institutions share the information with the credit bureaus.
Credit institutions are not obligated to share information and can give data to one, two, three, or none of the major credit bureaus.
Typically, credit bureaus store data on your balances, available credit, payment history, and the number of open and closed accounts you have. Collection agencies and debt collectors may also report to the credit bureaus if you have any delinquent activity.
The rest of the information credit bureaus collect comes from public court records. They access these records in search of any possible bankruptcies, tax liens, repossessions, and foreclosures.
How Do Credit Reporting Agencies Use My Information?
Credit bureaus use your information to create credit reports and credit scores. They then share your information with potential lenders, landlords, and employers for several reasons. Your credit report may be pulled up in the following scenarios:
- When a lender is checking your credit to see if you qualify for a loan
- When a landlord is deciding whether or not to accept your rental application
- When a new employer needs to run a background check
- When a utility provider is about to start a service contract with you
Credit bureaus also sell information for marketing purposes. Say a lender is looking for potential customers with poor credit who might need a credit card. The lender will reach out to a credit bureau, which will then sell the lender a prescreening list of qualifying individuals and their basic contact information.
However, some rules protect you and your data — particularly the Fair Credit Reporting Act (FCRA).
The FCRA is a law that states you have the right to know your credit report and the right to dispute any errors on your credit report. It also lays out what is a “permissible purpose” for a lender to pull your credit and what is an “impermissible purpose.”
If a potential lender, landlord, utility provider, future employer, or insurer — you name it — wants to view your full credit report, they must have a permissible purpose and your permission first. Check out the differences between your credit report VS credit score.
When Will I Use A Credit Reporting Agency?
You will use a credit bureau anytime you want to know or need to know your credit report or credit score. Here are five of the most common scenarios for when you will use a credit bureau:
- When applying for a loan
- Before renting an apartment or house
- To improve your credit score
- To check for credit errors
- To prevent fraud and identity theft
The Bottom Line On The Main Purpose Of Credit Bureaus
Credit reporting bureaus are an important part of your financial health. The credit reports and scores they collect allow you to prove your integrity as a borrower, make important business decisions, and prevent credit errors/fraud.
Once you get your credit report or score, you might realize it needs a bit of a boost.
Check out ways to improve your personal credit score.
You may also be surprised to know that credit bureaus don’t just collect individual’s credit information, they also collect credit information for businesses. Every business can have a credit report and credit score. Learn more about business credit scores to better understand how they can help you grow!