The top 3 credit bureaus

People talk a lot about credit bureaus. What do they do? How do they differ? And why are there three of them? (Actually, there are a lot more than that, but it's mainly a certain trio that affects most consumers' lives.) Let's take a closer look at these entities, what they do, and how they do it.

First, let's be clear what we're discussing. It's easy to confuse credit bureaus with credit rating agencies, especially since credit bureaus are also called credit reporting agencies.

Credit rating agencies deal mainly with companies and corporate creditworthiness. They arose out of the need for investors to compare the risk-reward potential of certain investments and as a way to gain insight into the financial stability of companies looking to borrow money by issuing bonds or preferred stocks. Nowadays, there are three major international players: Fitch, Moody's and Standard & Poor's. These agencies research and analyze a firm's financials, and assign a credit rating to them.

Different from credit reports or credit scores, these ratings are intended to provide investors with information about companies and the issuers of debt-based investments. The agencies also rate the particular debt obligations and fixed-income securities the companies issue. Finally, they rate insurance companies for financial solvency.

Credit ratings are issued in letters, such as AAA or CCC, so that investors are able to quickly look at a debt instrument and gauge its risk; they're a sort of shorthand about its soundness. The ratings differ among the three major agencies, so it is important to understand which one is providing the letters. Credit ratings are based on a huge number of variables and involve some market-based, historically estimated, firm-level information. Assessments range from business attributes to underlying investments and are all designed to offer a picture of the likelihood of the borrower to be repaid.

While credit ratings are compiled primarily for investors about companies, governments, and bonds, credit reports and credit scores are compiled primarily for governments and lenders about individual borrowers. They deal with consumer creditworthiness.

One interesting feature about the credit bureau business model is how information is exchanged. Banks, financing companies, retailers and landlords send consumer credit information to the credit bureaus for free, and then the credit bureaus turn around and sell consumer information right back to them.

Credit bureaus package and analyze consumer credit reports from which credit scores are derived. Unlike credit ratings, which are issued in letters, credit scores are issued as three-digit numbers, typically between 300 and 850. Your credit score impacts the size of a loan you can qualify for, the interest rates you pay on those loans or on a credit card, and sometimes even your renting and employment opportunities.

Although both credit rating agencies and credit bureaus are private companies, they are highly regulated under the Fair Credit Reporting Act, or FCRA. They are limited in how they collect, disburse and disclose consumer information, and have come under increased scrutiny since the Great Recession of 2007-2009.

In the U.S., there are several different credit bureaus, but only three that are of major national significance: Equifax, Experian and TransUnion. This trio dominates the market for collecting, analyzing and disbursing information about consumers in the credit markets.

Equifax, based in Atlanta, has 7,000 employees and “operations in the U.S. and 18 other countries including Argentina, Brazil, Canada, Chile, Costa Rica, Ecuador, El Salvador, Honduras, India, Ireland, Mexico, Paraguay, Peru, Portugal, Russia, Spain, the United Kingdom and Uruguay.” Especially dominant in the southern and eastern sections of the U.S., it claims to be the market leader in most of the countries in which it has a presence.

Experian, whose domestic headquarters is in Costa Mesa, Calif., originally handled reports for the western United States. Now it promotes itself as “the leading global information services company.” The firm “employs approximately 16,000 people in 39 countries and has its corporate headquarters in Dublin, Ireland, with operational headquarters in Nottingham, UK and São Paulo, Brazil.”

TransUnion markets itself as a “global leader in credit information and information management services.” The Chicago-based firm has “operations and affiliates in 33 countries.” It employs approximately 3,700 people.

All three rating agencies collect the same type of information about consumers. This includes personal data, such as name, address, Social Security number and date of birth. It also includes credit history, including debts, payment history and credit-application activity.

It is common practice for the credit bureaus to collect information from federal and private student loan and housing lenders. If you are delinquent in making mortgage payments, Sallie Mae can report you to a credit bureau – typically after the 45-day mark. Federal loans provide more leeway, allowing 90 days to pass before filing a report.

The Internal Revenue Service (IRS) doesn't report overdue income tax to the bureaus. However, if a taxpayer does not repay his tax debt in a reasonable amount of time, or if he owes a lot of back taxes, the IRS might file a federal tax lien (a legal claim against a taxpayer's property) with the local county clerk's office; a tax lien filing is public information, and the bureaus can find it through third-party research.

Each firm uses all this information to develop consumer credit reports and calculate credit scores. The higher the score, the lower the credit risk a consumer is deemed to be – and the higher his creditworthiness.

These scores have historically been based on the FICO® Score associated with the data-analytic company originally known as Fair, Isaac and Company (the firm’s name changed to FICO in 2009). While you can still get a FICO score from any of the Big Three, their calculation methods differ. Experian uses its own Experian/FICO Risk Model v2. Equifax has a proprietary scoring system as well (on a scale from 280 to 850), usually just referred to as the Equifax Credit Score. TransUnion's default credit score is called VantageScore, which was created cooperatively with the other two bureaus as an alternative to the FICO system; its predictive scoring system is also referred to as TransRisk.

The result of all this? Your individual credit score, and even your FICO score, may vary from bureau to bureau. These differences are based on the different proprietary calculation methods, gaps in information reporting and gathering, and the fact that bureaus do not always have the same information about your debt history at the same time. On any given day, one firm may have different information about you on file than the others.

Suppose you apply for a loan, line of credit or credit card from a lender. That lender almost certainly performs a credit check, requesting that a report on you be run, from at least one of the three major credit bureaus. But it does not have to use all three. The lender might have a preferred relationship or value one credit scoring or reporting system over the other two. All credit inquiries are noted in your credit report, but they only show up for the bureaus whose reports are pulled. If a credit inquiry is only sent to Experian, then Equifax and TransUnion do not know about it, for example.

Similarly, not all lenders report credit activity to each credit bureau. So a credit report from one company can differ from another. Lenders that do report to all three agencies may see their data appear on credit reports at different times simply because each bureau compiles data at different times of the month. Delinquency generally doesn't affect your credit score until at least 45 days have passed.

Most lenders examine just one report from a single credit bureau to determine an applicant's creditworthiness. The major exception is a mortgage company. A mortgage lender examines reports from all three credit bureaus, because such large amounts of money per consumer are involved; it often bases the approval or denial on the middle score.

The bureaus' scoring systems are not set in stone either; each of the methodologies (including FICO) has undergone changes throughout the years as part of ongoing efforts to improve accuracy. It is very possible for your credit score to change over time with the same bureau even if your debt history hasn't, simply because the scoring method has been tweaked.

Yes. Credit information is often not reported with the same accuracy across all three credit bureaus, so it is important for consumers to check each report and score. (Under the Fair and Accurate Credit Transactions Act (FACTA), an amendment to the FCRA passed in 2003, consumers are able to receive a free copy of their report from each credit reporting agency once a year.)

Since some creditors and collectors only report to one or two agencies. Some items get disputed off one report, but are verified on another. Items also get removed from one or two reports for various reasons. This variation often means a large credit score difference from bureau to bureau. When a credit score is requested, it is calculated based on what is in that particular credit report. So while a consumer may have a solid credit score based on one report, he or she may have a dicier credit score based on another. For example, if a consumer has two collections on report A and none on report B, the score calculated from report B is obviously going to be higher than the one calculated from report A.

If a consumer is denied credit based on one bad credit score but has a better credit score with another bureau, he or she may have luck calling the creditor and asking for the better score to be considered, especially if there is a good reason why the first credit score is so low.

You can't control which agency a company researching you will consult. But, companies and methodologies aside, higher is always better. While comparing scores may not reveal identical numbers, it is still a useful exercise. If you have a good score at one company, you should have good scores at all of them, even if the actual numbers are slightly different.

To get your annual free credit report from each agency, go to https://www.annualcreditreport.com/index.action.