By Ryan Levin on November 14, 2011
.jpg.aspx) Any lender, whether for a small loan, a mortgage, a credit card, or any other type of lending, will want to know if you can be trusted to pay back a loan before they’ll let you take one out. Thanks to information-collecting companies called credit bureaus, creditors can find out your borrowing and payment history and learn how well you’ve handled borrowing money in the past. When a credit bureau shares information with a lender, it’s called a credit check, and it gives lenders an idea of your “creditworthiness”, or how well you can be trusted to pay back loans.
When a lender or another company performs a credit check, they receive a credit report: a document that contains your personal information—address, place of employment, date of birth, etc.— and every important element of your credit history. It lists in detail both your outstanding and your paid accounts. Some might be considered adverse: for example, balances that you have been late on paying, or credit cards on which you’ve gone over your credit limit. Loans that you make timely payments on and manage well are considered satisfactory accounts. Creditors can see it all when they make a credit check, and they use that information to determine whether or not you deserve a loan, or to determine what the interest rate will be on your loan.
There are three major credit bureaus in the United States: Equifax, Trans Union, and Experian. Each of these performs essentially the same function: gather credit information about people, and sell it to creditors who want to learn about your creditworthiness. In addition to offering a credit report like the one described above, credit bureaus also use a formula to condense all your credit information into a single number—a credit score—that represents your overall creditworthiness. This is the most common way for lenders to decide who to lend to and at what rates.
According to U.S. law, each of the three credit bureaus is required to make your credit report available to you for free once each year. That means that, since there are three bureaus, you can obtain your free credit report up to three times every twelve months. You can even get your credit report online, once you verify who you are. You won’t get your credit score for free when you get your report; for that you have to pay. Either way, it’s valuable to know what creditors will see when they look you up in the records of the credit bureaus by doing a credit check.
References:
http://www.experian.com/
http://www.transunion.com/
http://www.equifax.com/home/en_us
http://www.wisegeek.com/what-is-a-credit-check.htm
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