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What Is a Credit Report? Important Definitions and How Data Is Gathered

TLDR

What You Need To Know

  • A credit report contains financial information that details how you’ve managed credit in the past
  • Some lenders may not report to all three bureaus, so each report may contain slightly different details
  • Credit scores are based on your credit reports

Contents

Like it or not, your credit reports have a big influence over your financial life.

When you apply for a mortgage or try to lease an apartment, your credit reports are typically reviewed. Need to take out a personal loan, open a credit card, or finance a vehicle? Your credit reports will be consulted again. Your credit reports might even play a role in your ability to land a job or coveted promotion.

Yet even though credit reports are so influential over our personal finances, many people don’t really understand them. What are credit reports exactly? Who creates them and what do they do with them? When did credit reporting even begin?

Keep reading for the answers to all these questions. You’ll be better informed (and hopefully better prepared) before you know it.

Credit Report Definition

A credit report is essentially a report card which is tied to your Social Security number and shows how well you have managed credit in the past.

Companies can purchase credit reports from the credit reporting agencies (CRAs) when you apply for new financing or services to help determine whether or not to take you on as a customer. Existing creditors (like your credit card companies) may review your credit history as well, to confirm that continuing to do business with you is still a smart investment.

Your credit reports list information like whether or not you’ve paid any of your bills late and, if so, how often you’ve missed your due date. Your reports might include data about how you manage your credit accounts — including credit cards, auto loans, and student loans — and how much outstanding debt you owe as well. Public records, like bankruptcies, will also be displayed.

Aside from financial details, reports will typically include personal information, like your date of birth and current and previous addresses.

Where Does Credit Report Information Come From?

The details on your credit reports primarily come from companies who are known in the credit world as data furnishers. Data furnishers are the lenders, creditors, and collection agencies that wish to provide information about their customers to the CRAs.

Credit reporting is done on a voluntary basis. There is no law that forces data furnishers to provide information about your accounts and your bill-paying habits to the CRAs. Likewise, no law requires a CRA to accept information and include it on your credit report. However, if information is shared and included on your credit reports, the Fair Credit Reporting Act (FCRA) requires for it to be accurate. (If you discover errors on your credit reports, the FCRA gives you the right to dispute those mistakes with both the CRAs and your data furnishers directly.)

While sharing credit information isn’t required under the law, many lenders do choose to update the CRAs about their customers’ accounts each month. Why? The answer in large part is mutual protection. Banks and other financial institutions share information to protect themselves from debtors who won’t pay as promised.

Lenders rely on credit reports and scores to help them predict the risk of doing business with new credit applicants. The more complete and accurate credit reports become, the better they are at helping lenders predict credit risk.

Credit Report Facts

Despite their importance, a lot of myths surround the subject of credit reports and how they’re used. The following facts may help you separate truth from fiction.

  • Lenders may review your credit reports when you apply for a loan, credit card, or other forms of financing.
  • Service providers (e.g., mobile phone companies, cable/internet providers, utility providers, etc.) may review your credit reports to decide whether to approve you for new services and how much to charge you.
  • Employers might review your credit reports (never your scores) when you apply for a new job or position.
  • Your credit reports are the basis for your credit scores.
  • Negative information generally cannot remain on your credit reports forever. The FCRA sets limitations which require most types of negative information to be removed from your credit reports within 7 – 10 years.
  • If you think you’ve found incorrect information on your credit reports, you have the right to dispute it.

How Credit Reports Can Lead to Poor Credit Scores

As mentioned above, your credit reports are the basis for your credit scores. If credit reports are report cards, your credit scores are your grades.

When negative information appears on your credit reports, your scores are likely to suffer. On the other hand, when your credit reports are free from bad information, scoring models like FICO® and VantageScore® will typically reward you with more points and higher scores.

If you want to steer clear of bad credit scores, try to keep the following types of information from appearing on your credit reports:

  • Late payments
  • Past due account balances
  • High credit card balances
  • Collection account
  • Too many new credit applications

A Little History

A lot of people love to hate the credit reporting system in the United States. However, before you jump on that bandwagon and decide that credit reports are designed to keep you down, it might be wise to take a look back at history first.

Modern credit reporting can trace its roots back to the 1800s. At the time, it wasn’t uncommon for crooks to rack up debts in one town and simply disappear without paying back the money they borrowed. These swindlers would then resurface somewhere new, create new fabricated identities, and take advantage of more unsuspecting merchants.

These practices hurt business owners and often drove up prices for everyone else.

To stop bad guys from taking advantage of them, merchants slowly began to create mutual protection societies throughout the United States. They created reports and swapped information with each other about customers who had failed to pay their debts.

  • Experian™ traces its history to 1803 to a group of London tailors who began to share information about customers who didn’t pay.
  • Equifax® traces its beginnings back to 1899, when the Retail Credit Company was founded in Atlanta by brothers Cator and Guy Woolford.
  • TransUnion® was originally created in 1968 by the Union Tank Car Company, a railcar leasing operation.

Unfortunately, early credit reporting systems had a lot of flaws. Before the three major credit reporting agencies grew to be the giants they are today, credit reporting was fragmented and subject to speculation. What was designed as a localized system to protect merchants too often hurt consumers who were judged unfairly.

In the 1800s, for example, merchants might share “credit reports” with information like “John Doe has a reputation for gambling.” Whether the facts on those early credit reports were entirely true or not, a new merchant might read the report and that was that. John Doe wouldn’t have a prayer of borrowing money or supplies.

Thankfully, the system evolved. The three CRAs began to acquire smaller, local credit bureaus to grow more centralized consumer databases. Creditors became more willing to share their account information with the CRAs as well. Eventually the federal government stepped in, and in 1970 it passed the Fair Credit Reporting Act to protect consumers and regulate how the credit reporting process we know today is managed. More legislation would follow.

Today, the three CRAs each manage an estimated 220 million consumer credit files.

How Credit Reports Can Help You

Many consumers choose to focus on the negatives when it comes to credit reporting. However, your credit reports are also powerful tools which you can use to your advantage.

If you put forth the effort to maximize your creditworthiness and make sure it stays that way, the benefits can be huge. In fact, if you work hard to keep your credit in good shape, it might save you more money than you can imagine.

Good credit may help you save money on interest rates, sometimes putting hundreds of dollars a month back into your pocket. With good credit you may also be able to qualify for better credit cards with valuable rewards and perks, and even pay less for insurance premiums.

Not sure what information is listed on your personal credit reports? You can claim a free copy of your credit report from each of the three major credit bureaus once every 12 months at AnnualCreditReport.com. You can also explore a variety of other options for credit monitoring, though you should still take advantage of your free credit reports if you use other monitoring tactics.

ICYMI

In Case You Missed It

  1. Your credit reports list information like whether you’ve paid any bills late and, if so, how often you’ve missed your due date

  2. Lenders rely on credit reports and scores to help them predict the risk of doing business with new credit applicants

  3. Good credit may help you save money on interest rates, sometimes putting hundreds of dollars a month back in your pocket

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