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On average, Americans each have $55,813 of debt according to data from the New York Federal Reserve that’s been updated for December 2021. The below chart shows the breakdown of total debt per capita in the United States over time, as well as for a few of the major states.

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Not only has the level of debt per capita been broadly stable in the $50,000 range over the last decade, but it actually has crept up in recent years. It goes without saying that understanding credit, the extension of which leads to this debt, is important for managing your finances. Banks and credit unions are the epicenter of credit extension and so understanding the credit system is an important element of better understanding these institutions. In the United States in order to get extended credit, consumers need to go through the Credit Bureau System. This article provides a lot of helpful facts and data on the Credit Bureau System in the United States.

Introduction to the Credit Bureau System

Most Americans need good credit reports to get access to credit which allows them to finance their wants and needs. For example, leasing or buying an apartment, leasing or buying a car or making typical retail purchases. Whatever the expenditure, the chances are that you will be using some form of credit to make the transaction. But before a bank or credit union (or other financial institution) provides you with an extension of credit, they first will check with the Credit Bureau System. This is what is informally referred to as performing a credit check. When a potential lender does a credit check, they are attempting to evaluate your credit worthiness by reviewing at least one of your credit reports. So how does this all work?

image showing how the credit bureau system works

The above image provides a quick summary of how the Credit Bureau System works. The Credit Bureau System consists of three credit bureaus: Experian, TransUnion and Equifax. These are the companies responsible for compiling, calculating and keeping track of your credit reports. When you’re seeking a new credit card for example, the issuer will run a credit check, meaning they will check your credit history and credit scores which are available in your credit reports. Your credit reports are maintained by one of the three credit bureaus. Importantly, the Credit Bureau System relies on a reciprocal relationship between the providers of credit and the credit bureaus. Just as the providers of credit regularly request information about potential borrowers to assess their credit worthiness, the credit bureaus also will continuously require updates from lenders about how borrower’s accounts are performing. For example, if you are consistently missing payments on you credit card, the credit bureaus need that information from your credit card company to update their calculation of your credit score and the record of your credit history.

With that background, below are 15 facts you should know about the Credit Bureau System in the United States!

All Credit Bureaus Operate the Same Way

As noted above, there are three main credit bureaus in the U.S.: Experian, TransUnion, and Equifax. These companies are also known as the “Big Three”. They all generally operate the same way – they collect information about how individuals’ credit are performing. According to Forbes, these three agencies maintain a database with details of around 220 million U.S. residents. The credit bureaus provide various services and products, including identity theft protection, credit reports, credit scores, credit monitoring, and more. While the three bureaus operate the same way, they do have some differences. One main difference between them is in their scale. Experian is the largest credit bureau in the U.S. in terms of total sales. It also is also the largest if you look at revenue outside of the U.S. Equifax is the second biggest credit bureau, followed by TransUnion. But that aside, from a practical standpoint how each of these three credit bureaus views your credit worthiness will tend to be very similar, because they focus on the same variables and operate very similarly.

The Credit Bureaus Sell Your Information

The Credit Bureau System depends heavily on big data. As noted previously, the bureaus maintain databases with information on over 200 million people. This data unsurprisingly is very valuable. Therefore, a key element of the business model is to sell parts of the consumer information they have compiled in this database to parties interested in extending credit. For example, because the database contains information such as how long an individual has had credit cards and how often they have failed to pay their credit card bills on time, this can help a credit card issuer assess whether to approve or deny someone a new credit card. Other organizations or companies that may use their services include car dealerships, appliance stores, apartment companies, hospitals, mortgage lenders, employers, or auto insurance companies. The three main credit bureaus earn billions of dollars each year from selling credit information.

Credit Bureau Collects Your Data from Data Furnishers

We know that the credit bureaus sell your information, but how do they get it in the first place? If you don’t recall providing these agencies with permission to open up a credit file in your name, it’s because that never happened. The bureaus actually get information from companies that have extended credit to you. These are companies that you owe debt to which could be a student loan, a credit card or a mortgage. These data-offering businesses, agencies, or institutions are also known as data furnishers and are going to tend to be providers of credit most of the time. They play a very important role in the credit bureau system and are the enablers of the reciprocal relationship we referred to earlier. Common data furnishers include banks, collection agencies and mortgage companies.

Credit Bureau System Aggregates Data From Many Sources

Data furnishers aren’t the only data resource for the credit bureaus. They can also seek information from data aggregation businesses like LexisNexis or PACER (Public Access to Court Electronic Records). They often seek information from these companies regarding bankruptcies and other public records. The reason for this is that lenders don’t have all of the information about consumers and some lenders might not provide updates to the Credit Bureaus in a timely fashion. The credit bureaus collect different data types to put on your credit report. The most common data categories include:

  • Personal information (name, address, date of birth, social security number, employer).
  • Collections (accounts managed by third-party debt collectors).
  • Public records (bankruptcy, judgments, tax liens).
  • Credit inquiries (when the credit was accessed in the past two years).
  • Accounts (credit obligations, payment history, account numbers, current balance, status, credit limit, account opening date).
Credit Bureaus Are Governed By Federal and State Laws

Even though a credit bureau can collect and sell your information, they still have to follow the law. For example, all credit bureaus must follow the Fair Credit Reporting Act. The main purpose of this act is to protect you and regulate what the reporting agency needs to do regarding your credit information. Some notable provisions include:

  • Credit Report Accuracy. A credit bureau must share accurate information about your credit reports. Otherwise, you can dispute the information and send it to the bureau for further investigation.
  • Permissible Purpose. A credit bureau can sell your credit report to entities like insurance companies, landlords, lenders, or employers. These third parties receive a “permissible purpose” to get a copy of your report. But your ex-husband or neighbor is not permitted to get a copy of your credit report.
  • Freeze the Credit Report. You can freeze your reports to prevent companies with no relationship with you from accessing your credit information. To grant them access, you have to unfreeze the report. You can do so repeatedly and for free. The added benefit of this provision is that if your credit report is frozen, then in the scenario where your identity is stolen the thieves won’t be able to open new credit cards or other new credit.
  • Opt-Out of Information Sharing. Credit bureaus often sell consumer information for marketing purposes. If you keep receiving credit or insurance offers in the mail, there’s a chance your data was sold without your knowledge. You can opt-out from the credit bureaus sharing your information for marketing purposes by visiting optourscreen.com or calling 888-5-OPTOUT (888-575-8688).

While the credit bureaus certainly have access to a lot of your information, it’s important to know that you still have rights and are able to restrict what they can do with your data.

Your Credit Score Depends on Five Factors

So how do the credit bureaus calculate your credit score? Your credit score is clearly the primary output of the credit bureau system and is what most lenders are seeking. In fact, many lenders promote their financial products with a minimum credit score required to be eligible. There are five factors that tend to impact your credit score:

  • Payment History (35%) – the bureaus will be looking at your ability to make consistent payments, with as few late or missed payments as possible.
  • Credit Utilization (30%) – for this they are looking at how much credit you use relative to how much you have available. For example, if you have $10,000 of credit available but only have a $1,000 credit balance, that would be considered good and would be a positive benefit to your credit score.
  • Length of Credit History (15%) – the longer the history, the more insight credit bureaus have into how you have handled the extended credit. Therefore, the longer the history the better, generally speaking. That being said, the presumption here is that your accounts have been in good standing over the relevant time periods. If you’ve had multiple accounts open for many years without any incidents that will be a positive benefit to your credit score. However, even if you’ve had an account open for decades but multiple times a year the lender is reporting that your payments were late, that could offset the fact that you’ve had a credit history for a long period of time.
  • Inquires and New Credit (10%) – too many inquiries to review your credit report can negatively impact the credit score. Also having newer forms of credit offsets the length of time you’ve had credit for and therefore can lower your credit score.
  • Diversification of Credit (10%) – in general if you have several accounts that is a positive for your credit score as it indicates you’re able to service many accounts. But again this assumes your accounts are in good standing
670 is The Threshold For a “Good” Score

Of course there will be variations depending on the credit bureau but FICO provides a good guideline for how to think about scores on a spectrum from bad to good to excellent. Generally credit scores range from 300 to 850, with a higher score obviously being better. This is the typical breakdown of scores:

  • Poor – Under 580
  • Fair – from 580 to 669
  • Good – from 670 to 739
  • Very Good – from 740 to 799
  • Exceptional – 800 and above

The way lenders will look at credit score ranges is that a lower credit score means the likelihood that someone becomes delinquent on a credit extension is higher. But what do these scores mean in actuality?

The Credit Scores You Need For a Mortgage and Auto Loan

To help contextualize things we looked at data from the Federal Reserve for 2021 which showed what percentage of mortgage approvals came from consumers with credit scores across the spectrum. We did this analysis also for auto loans:

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The results might be surprising. In 2021, 95% of the mortgages that were originated in the United States were for consumers that had a credit score above 660, and 86% of the mortgages were for individuals that had a credit score above 720. So one can conclude that in order to get a mortgage you have to have good credit or better, which shouldn’t be surprising. Not only does your credit score impact the likelihood of getting approved for a mortgage loan, but it also determines the mortgage rate that will be offered to you. For auto loans, the conclusion is quite different. Your odds of getting an auto loan obviously increase depending on your credit score, but 29% of all auto loans in 2021 were to consumers that had credit scores that were either poor or fair

Credit Scores Can Vary Among Credit Bureaus

As previously mentioned, the credit bureaus collect data from different types of businesses. If you review your credit report from each credit bureau, you’re likely to come across some differences. There are several reasons for this. First, the credit bureaus are competitors and don’t share data with each other. Second, credit bureaus don’t necessarily get all of their information from the same data furnishers. One bureau may gain access to more information than the other two. In addition, while the credit bureaus all run data through a FICO designed model, they can and do make individual tweaks to the formulas. For example, While FICO works with scores from 300 to 850, you may also encounter other models that assign scores from 250 to 900.

You can also find companies that offer an “educational” score. This score is only for the consumer, and it serves to let a person know what their risk level is with the lenders.

The Average American Has “Good” Credit

Based on data from 2021, Experian announced in February that the average FICO score in the United States increased from 710 to 714 in 2021.

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In fact for the last decade the average American has had what would be considered good credit and the average credit score in the country has improved every year for the last 4 years. It is noteworthy that the single biggest increase in average credit scores in the United States occurred in 2020 the same year as the start of the Coronavirus pandemic which triggered a recession. Consumers not only benefited from government stimulus but also were stuck at home which likely led to abnormally high savings.

Credit Bureaus Sometimes Make Mistakes

The credit bureau system is far from perfect and people often file complaints to the authorities. A CFPB report from October 2021 noted that credit reporting issues increased by 129% in 2020. People often have complaints about incorrect information, investigation failures and their inability to get a copy of their credit report. In fact, in the past some of these bureaus have had to pay millions of dollars in fines for mistakes or other behaviors. Most recently Experian agreed to pay over $400 million to customers as a result of its data breach in 2017.

Consumers Are Entitled to Three Free Credit Reports Per Year

The right to a free credit report is one of the ways to protect you as a consumer. A credit report shows a list of your creditors, outstanding balances and accounts you have open. Consumers can get one report per year from each of the three major credit bureaus. This is something you can get directly from the credit bureaus for free! Other than the credit bureaus, there are other ways to get access to your credit report including website like annualcreditreport.com. However, the such websites are not required to provide you with the credit reports for free.

Cancelling Old Credit Cards Lowers Your Credit Score

As mentioned above, the length of time you’ve had credit accounts open makes up to 15% of the calculation of your credit score. Therefore old credit cards can positively impact the score since they increase the overall length of time. The reverse is also true, cancelling old credit cards will reduce the length of time you have had accounts open on average and therefore will have the impact of lowering  your credit score.

Zero Balances on Credit Cards Doesn’t Hurt Your Score

It’s a common myth that having a zero balance on a credit card negatively impacts your credit score. However this is not true. In fact it’s quite the opposite. Because while it means you don’t use your card to make purchases, it still contributes to your credit history length without risking late payments. It also means your credit utilization is very low and we discussed earlier, your credit utilization makes up a third of your credit score. In practice what all of this means is that sometimes if you’re considering canceling a card, it might be better to raise the limit on another card to maintain the same credit utilization. In general though, its better to just keep the card instead.

Credit Scores aren’t the Only Deciding Factor

Your credit score is not the only factor lenders will consider before extending you credit. For example, mortgage lenders will request a lot of information in addition to your credit reports before approving a mortgage loan. This includes bank account and other savings account information and letters from your employer. It is also possible to provide context to some lenders to help explain issues in your credit score or credit report. In many cases your credit score only represents one factor in a lenders decision to approve a credit extension.

Most Issues Disappear From Your Credit Report After 10 Years

Bankruptcy is more or less the worst thing that could happen to someone financially. It indicates that someone was unable to service or repay their debt and therefore defaulted. But even bankruptcy will disappear from your credit report after a period of 7 to 10 years. The point is that while financial missteps can be painful, they are not permanent and the Credit Bureau System is structured in a way that helps most people recover if they change their behavior.

Closing Thoughts on The Credit Bureau System

Knowing how the credit bureau system works is crucial whether you’re about to build credit for the first time, are rebuilding your credit or simply trying to maintain your current credit score. These agencies are important as they are the gatekeepers to credit which plays a significant role in society and is something that impacts all consumers. Whether you’re buying a home, buying a car or applying for a credit card, its pretty much a guarantee that the credit bureaus will be involved. Hopefully you now have a better understanding of the Credit Bureau System and the critical role it plays in your financial life.