What Is a Credit Bureau? How the Agencies Help Credit Card Issuers Determine Risk

For some folks, “bureau” has a vaguely negative connotation. After all, it is, by definition, staffed by bureaucrats, stereotyped as pencil-pushing, rule-following sticklers who are more interested in procedures than people. 

That seems a little harsh, and I’d like to think it’s untrue of the good people who work at the three major U.S. credit bureaus — Experian, Equifax, and TransUnion. These credit-reporting agencies make a huge difference in our financial lives. 

A credit bureau is a business that maintains your credit history record and uses this information to help lenders gauge your creditworthiness. 

Below I cover how credit bureaus work, what they can do to your chances of getting credit, and how they help card issuers weed out financial risks from clear bets.

Credit bureaus play a critical role in the financial ecosystem by providing vital information for credit-related decisions. In their absence, every lender would be left guessing about your creditworthiness. 

Think of credit bureaus as gatekeepers of your financial reputation. They hold the key to your credit score and how lenders view you.

Data Collection 

It’s not like credit bureaus just sit around, hoping information will come their way. In fact, they seek it out mainly from banks, credit card companies, and other lenders. 

Every time you apply for a loan/credit card or make — or, worse, miss — a payment, that’s reported to the bureaus and added to your credit file. The result is a highly fleshed-out financial profile of you, one transaction at a time.

They don’t stop at your payment histories. They include outstanding debts, credit limits, and even how frequently you apply for new credit. They compile reams of credit information, from mortgage payments to credit card balances. It’s a comprehensive picture of your financial behavior, following you throughout your lifetime. 

Every month, creditors and lenders send new information to the bureaus, which continually update your credit reports.

It’s the dynamic nature of credit reporting that allows your credit profile to change in light of your most recent financial activities.

Credit Reporting 

After collecting all this data, credit bureaus compile it and develop credit reports. These reports act like financial report cards, encapsulating your credit history and status so that it is up-to-date.

Creditors (i.e., lenders and credit card issuers) pull your credit reports to see if you have been financially responsible enough to receive credit and, if so, on what terms.

Your credit reports compile your payment history, what you owe, the length of time you have had credit, the types of credit used, and new credit. 

The wealth of information in your credit report allows lenders to assess your creditworthiness and helps them decide whether to approve your application for a loan or credit card.

Besides lenders, potential employers, landlords, and even insurance firms may look into your credit history while making decisions. This is why monitoring and ensuring that your credit reports are free from errors is important because bad credit, whether deserved or not, harms your finances.

Impact on Consumers

The issues related to your credit reports are far greater than whether you can secure a loan or credit card. They also may affect your opportunity to get a job or to rent an apartment because some employers and landlords check credit reports during their evaluations. 

In a sense, your credit reports really represent your financial reputation on paper. Moreover, the bureaus use your credit reports to calculate your credit score. They can either open or close doors in both your personal and professional lives. 

Your credit report is a reflection of your financial situation, so it can impact everything from your job prospects to your ability to rent an apartment or buy a home.

A higher credit score can mean easier access to credit and lower interest rates. That, over time, will save you money and enable you to receive high credit limits. Conversely, a poor credit history will make it more costly to borrow and may even trigger a flat denial of credit. 

You want to avoid or repair bad credit since it impacts your lifestyle, from purchasing a house to landing a job. This is why it is important to understand how your credit report affects you and what to do to keep it in good shape.

Equifax, Experian, and TransUnion are the three major credit bureaus in the United States. You can think of them as the Charlie’s Angels of credit, investigating creditworthiness and fighting risk.

These agencies keep information regarding your credit, with each of them having the data that lenders use to make informed decisions. 

They all perform the same duties but have different histories and services that set them apart from one another.

Whether you are approved for that bright, shiny new credit card will mostly be determined by the credit bureaus. When you apply, credit card companies do not rely on your word; they pull your credit reports to determine whether your financial habits meet their standards.

Assessing Your Creditworthiness

Having been rejected more than once over the years, I know firsthand that issuers don’t accept just anybody applying for a credit card. They go through your credit report to see whether you are really creditworthy. 

The report contains your financial track record — whether you pay your bills on time, how much debt you have, and how long you’ve used credit. 

All these details go a long way in helping an issuer decide whether you are a responsible consumer or a potential debt dodger.

Credit reports are the basis of your credit scores. The higher your score, the more trustworthy you are to potential credit card issuers. A good score can mean the difference between “Approved” and “Sorry, not this time.” 

Your credit scores also influence the kinds of credit card offers coming your way. Higher scores can bring better cards with larger rewards, lower interest rates, and higher credit limits. Lower scores may only qualify for high-fee, high-APR cards with few perks.

Determining Credit Limits

When a credit card issuer decides it wants to approve your application, it needs to figure out how much credit it is prepared to grant you. Again, it all goes back to your credit report.

Based on your score and the information in your report — how much debt you’re already carrying and how well you’ve managed credit in the past — card issuers decide how high to set your credit limit.

This is the issuer’s way of controlling risk. Maintain a strong credit history, and you’re more likely to earn a high credit limit. Issuers perceive you as less of a risk and are willing to provide you with more spending power simply because they trust that you will manage the card responsibly. 

On the other hand, if late payments or high balances appear in your history, expect a lower credit limit. This is how the issuer protects itself against potential losses in case you default on your debt. Building a good credit profile really pays off when it comes to your credit limits.

One of my nephews had terrible credit —I mean, really lousy. He was lucky to get a low-limit secured credit card. I have to hand it to him. He used that card carefully and slowly rebuilt his credit. He now has a couple of mainstream, unsecured cards and is no longer the butt of jokes at Thanksgiving dinners.

Setting Interest Rates and Terms 

Your credit profile does more than determine whether you are approved for a credit card and how much credit you’ll get. It also helps determine the interest rates and terms of your credit card offer. 

The higher your credit score, the better the terms you are likely to receive.

A higher credit score most often means you are a low-risk borrower, which ultimately translates into a lower APR. That’s important if you plan to carry balances from month to month. If your credit is poor, issuers will charge more in interest and fees.

I regularly review subprime credit cards, and a few have fees bordering on the criminal. It makes little sense to pay a $150 signup fee and more than $100 in yearly charges for a card with a $300 credit limit and 36% APR. 

You will do much better by getting a secured credit card. Your security deposit buys you easy acceptance, a credit limit of your choosing, and lower costs. Pay on time for six months or so, and you can graduate to an unsecured card of much better quality than those bottom-scraping stinkers. 

Credit bureaus are not simply gatekeepers for credit cards. They are important resources for many other financial decisions that can alter your life, from lenders considering whether they should approve your mortgage application to employers evaluating you for hire. 

I’ve noticed that many people are unaware that their credit reports often land on the desks of potential employers and landlords. 

That’s an important reason you should work toward a strong credit profile.

Lending Approval

To the average lender, your credit report is probably more important than a reference letter attesting to your financial responsibility. That shouldn’t surprise you – lenders are on the lookout for proof of creditworthiness (i.e., timely payments, low balances, and a history of handling credit well).

If your credit report supports this view by proving you have had a responsible attitude toward your credit, your approval chances will more than likely increase. Good credit can help you secure a loan with better terms. For example, you may qualify for a mortgage with a lower interest rate and origination fee. That can save you many thousands over the loan’s duration.

Employment and Housing

There’s a good chance your credit report will affect your access to that dream job or perfect apartment. Many employers and landlords check credit reports as part of the decision-making process. What they look for, however, is not just whether you pay your bills on time but your overall financial responsibility. 

A good credit report may help you edge out the competition when it comes to applying for a job or lease. For recent college graduates, a good credit history may be as important as your undergraduate transcript. That’s why it’s a great idea to get a student credit card when you enter college and use it responsibly.

If you are first entering the job market and aren’t a college graduate, your credit report becomes even more important in the decision-making process. For older workers, some flaws in your credit history may put you at a disadvantage despite a good employment or rental record.

Thus, having a healthy credit history may open doors you might not have even known were there in the first place. 

However, there is a darker side to how credit reports are put to work regarding employment and housing applications. 

A number of studies suggest that some employers and landlords leverage credit reports to discriminate against minorities, thereby perpetuating the existing systemic inequality. 

The practice might not be out in the open but the impact is quite extensive. It serves as a reminder to promote fair and equal treatment in all areas where credit reporting comes into play. If you suspect discrimination, it’s essential to know your rights and take action to protect yourself.

If you believe you’ve been discriminated against, there are numerous ways to lodge a complaint, depending on the arena. Here are a few:

• Housing Discrimination: You can file a complaint directly with the US Department of Housing and Urban Development by going to its website or calling 1-800-669-9777.

• Local Fair Housing Organizations: You can also report to local or state fair housing agencies. You can contact the National Fair Housing Alliance with any support requests or to be referred to local organizations.

• Employment: If you believe you were discriminated against while job hunting or at your place of work, you can file a complaint with the Equal Employment Opportunity Commission at its website or call or visit one of its field offices—they have many throughout the country.

• Credit and Lending Discrimination: If you believe you have been discriminated against with regard to credit or in a loan practice, you can file a complaint against the institution through the Consumer Financial Protection Bureau website or call 1-855-411-2372.

• Local Legal Aid Organizations: Many local legal aid organizations provide this kind of assistance for discrimination claims. You can identify the nearest available resources at the Legal Services Corporation website or with your state bar association. 

All of these agencies or organizations will advise you on how best to proceed with your complaint and what evidence you may need.

Think of credit bureaus as the behind-the-scenes players that keep our financial world ticking. They track each and every move that is made with your credit — paying off debt, maxing out a credit card, or applying for a loan — and bundle it all together. 

Credit bureaus assemble your financial story in report form and provide it to lenders, credit card issuers, employers, landlords, and others who decide whether or not they want to take any chances on you. 

You can think of it as a financial report card that basically follows you everywhere — the better it is, the more doors will open up to you, and the worse it is, the more doors will shut.

It’s not just about numbers on a page, though. Scores provide credit bureaus with a baseline to help ensure the system is fair (assuming everybody plays by the rules). That said, these reports aren’t perfect. Mistakes happen, and there are times when the system turns out not to be as fair as it should be. 

For all these reasons, you need to keep tabs on your credit: check your reports, correct any mistakes, and see that you practice creditworthy habits. Ultimately, you’re the one responsible for making sure your reports tell a good story.