Your Basic Guide to the Big Three Credit Bureaus
Every time you swipe a credit card, take out a car loan or make a mortgage payment, three sets of eyes are watching closely.
America's big three credit reporting agencies -- Equifax, Experian and TransUnion -- track many of your financial transactions and other information, including:
-- Credit card balances
-- Loan balances
-- History of payments on loans and credit cards
-- Number and type of accounts you hold
-- Bankruptcy filings
Each agency uses this information to assign you a credit score. Banks, credit card issuers and other lenders look to such scores to determine how safe it is to lend to you and what interest rate you will pay.
The notion that multiple agencies are keeping tabs on your spending might sound like an invasion of privacy -- and potentially dangerous, especially in the wake of the recent massive Equifax data breach. However, there is no practical way to avoid having your transactions documented, says John Ulzheimer, a credit expert who has worked for Equifax in the past.
"Live with the fact that you're going to have a credit report," he says. "It's better to understand how they work than to sit there and complain about them."
[Read: The Best Credit Cards of 2018.]
How Credit Reporting Agencies Compile Your Information
While many credit reporting agencies monitor financial behavior, Equifax, Experian and TransUnion dominate the industry.
Each of these agencies keeps a credit report on you. Your day-to-day financial activity makes up the bulk of information that appears in your credit report.
For example, when you apply for a credit card, loan or other form of borrowing, the lender likely will alert one or more of these credit agencies about your activity. That information then will appear in your report.
"There's no requirement to report to all three credit bureaus," Ulzheimer says. "As a lender, you can choose to report to one or two or none or all three."
Most big lenders report to all three, Ulzheimer says. However, smaller lenders might alert just one of these agencies.
Two other sources contribute vital information that finds its way into your file.
Debt collectors sometimes report information about you to the agencies, such as your failure to pay bills that you owe.
For this reason, it is a mistake to assume that delinquent payments on things such as utility and cable TV bills -- or even an unpaid gym membership or magazine subscription -- will not appear in your credit report, says Thomas Nitzsche, credit educator at Atlanta-based Clearpoint Credit Counseling Solutions.
"If you do fall behind on those, after a few months they can go to a collection agency," he says. "At that point, the collection agency can report them."
Finally, credit reporting agencies may turn to public records, such as bankruptcy filings, to collect data.
In recent years, some items that previously appeared in your report and greatly impacted your score -- including medical debt, paid collection debt and tax liens -- no longer carry as much weight with credit reporting agencies, Nitzsche says.
"From a consumer standpoint, it's obviously a good thing," he says.
How Credit Reporting Agencies Use Your Information
As a credit reporting agency compiles your financial information, it goes into a credit report that serves as the basis for your credit scores.
To calculate a credit score, the agencies must "marry a credit report with a scoring model," Ulzheimer says.
The primary scoring models -- FICO and VantageScore -- are "the King Kong and King Kong Jr. of the scoring industry," Ulzheimer says.
[Read: The Best Low-Interest Credit Cards of 2018.]
FICO created and owns the oldest and most widely used scoring model. FICO allows the credit reporting agencies to use its scoring algorithm to generate credit scores, says Ulzheimer, who also previously worked for FICO.
FICO determines which factors -- such as the amount of credit available to you and your payment history -- weigh most heavily on your score.
"The bureaus don't have any influence over the weighing of information in your FICO score," he says. "FICO has control over that because they are the ones that built the model."
Because the individual agencies feed data from their own credit reports into the FICO model, scores tend to vary from agency to agency.
"Your credit score is likely to be different across the three because the data isn't going to be the same," Ulzheimer says.
Equifax, Experian and TransUnion also have joined forces to create their own credit scoring model, dubbed VantageScore. Essentially the new kid on the block, VantageScore exists as a subsidiary of the three major credit reporting agencies.
"Because [the agencies] built the model, obviously they have exclusive control over how things are weighted," Ulzheimer says.
How to Keep Your Credit Score in Top Shape
In addition to the big three, there are many smaller credit reporting agencies that also track consumer financial behavior.
Such "fourth bureaus" have popped up to serve different niche markets, Nitzsche says. For example, some might track rental payments, while others track payments to a payday lender.
There is no way to prevent credit card companies from gathering information about your financial transactions. Ulzheimer says, "There's no button you can push; there's no law you can cite" to prevent such activity.
"You don't have the right to not have a credit report," he says.
However, you still can make sure the information in your report is accurate. "Consumers have the right to challenge things," Ulzheimer says.
[Read: The Best No-Annual-Fee Credit Cards of 2018.]
If you find an inaccuracy on your report, alert the credit reporting agency in question and request that the notation be removed. Then, check your other credit reports to see if similar errors appear there.
Ultimately, each agency will determine the validity of your complaint and whether your request is successful.
"That consumer might be successful in getting something removed from one of their credit reports but not successful in getting it removed from the other two," Ulzheimer says.
Also, you can take steps to protect yourself if the risk of identity theft worries you. "Freezing your reports at the big three is really the step to take," Ulzheimer says.
Doing so prevents thieves from opening new accounts in your name. However, it also makes it practically impossible for you to open legitimate accounts while your credit remains frozen. In many cases, you must pay a small fee to both freeze and unfreeze your accounts, although pending legislation in Congress would make the process free for all.
Both Ulzheimer and Nitzsche encourage consumers to regularly monitor their credit reports. Federal law requires each of the major credit reporting agencies to provide you with a free annual copy of your report.
You can request this report by visiting AnnualCreditReport.com, which is run by the three major credit reporting agencies.
The Danger of Ignoring Your Credit Report
Nitzsche says it is important not to wait until the last moment before a major purchase -- such as getting a mortgage on a new home -- before checking your credit report for errors.
"Sometimes, it takes a matter of weeks or months to get things resolved," he says. "So, you really don't want to wait until the heat of the moment."
Ulzheimer adds that merely checking your file with each agency once per year is not good enough.
"That's woefully inadequate," he says. "Once a year is terrible. I want to see what's on my credit report every month."
He recommends signing up with a service that will let you regularly access your credit reports. "So many companies are willing to give them to you for free," he says.
Finally, Nitzsche recommends automating your payment system so you do not forget to pay your bills.
"Don't rely on your memory to help you out," he says. "Those due dates creep up, and you might miss a reminder."
Paying bills on time is paramount to keeping your credit score strong at every credit reporting agency.
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