More on Credit Reports

Where does a credit report come from?
There are three credit reporting agencies, Equifax, Experian and TransUnion. These three reporting agencies receive monthly reports from a variety of creditors about whether you and other customers are making loan payments on time. The reason that credit reports are different across the three agencies is that not all lending institutions report to the same credit agency. For example, your bank may report to Experian, but not TransUnion or Equifax while your mortgage lender and the bank with whom you have your car loan report to TransUnion and Equifax. Information about bankruptcy filings, court-ordered judgments, tax liens and other public record information is collected by agencies from courthouse records.

How is your credit report used?
When you apply for a loan, lenders look at your credit report to assess the risk associated with lending to you. If you have a history of making late payments, skipping payments or have not paid your taxes, creditors may be less likely to lend to you, or may choose to lend at a higher interest rate. A poor credit report may also affect your ability to get a job, be approved for insurance or rent an apartment.

If you have never applied for a loan or used credit, you may have no credit history and lenders may be wary to extend credit to you because there is no record of your repayment habits. Once you have borrowed and repaid credit, other creditors are more likely to make a loan to you because they have information that you have a history of repaying credit.

In addition to your credit history, lenders may also consider your income, length of residence and employment, as well as other factors, when deciding whether or not to extend credit to you.

For example, assume three people apply for a loan. Bob has been working for several years and has never applied for a loan. He has no credit history.

Michael has been working for several years. He has been late making his car payments and recently stopped paying them all together. There is a tax lien on his house.

David has also been working for several years. He took out a car loan last year. He has been making the payments on time and has a good credit history.

Based on this information alone, if you were a banker, which application would you find the least risky? Both Bob and Michael would be considered risky. Michael has a poor record and has not repaid his loans. Bob has no history so we don't know what kind of borrower he would be.

Establishing credit history
If you have never applied for a loan, you will probably not have a credit history. Creditors might deny a loan application because it is unknown whether you will make the payments. Creditors might also deny a loan application if you have a bad credit history because it indicates there is a greater chance you might not repay a loan. If you are paying your loans on time and have had no problems in the past, lenders will be more willing to make you a loan. A good credit record indicates you will most likely pay back the loan.

Keep in mind credit reporting agencies do not make credit decisions. Credit reporting agencies simply report the information provided by creditors. This information helps lenders make loan decisions. Lenders have different requirements for approving loans. Their decisions might be based on factors other than just your credit report such as income, length of residence and employment.

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