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Credit Reporting Agencies: What are They and How do They Work?
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Credit reporting agencies, we know who they are (in Canada there are two, Equifax and TransUnion) and we know that they’re the keepers of our ever important credit information. But, more often than not, our knowledge of these agencies ends there. So that you’re as informed as possible about your credit, let’s take a look at how credit reporting agencies work, why they’re so important and finally how you can use their services to better your financial life.
What is a Credit Reporting Agency?
A credit reporting agency is a company that compiles information about how individuals handle their credit and debt, make payments and, pay off their loans. Credit companies, lenders, and banks provide credit reporting agencies with this information and then the agencies create a credit report for each individual.
A credit reporting agency will then provide this credit report to either the individual it belongs to, or to a credit or loan provider. Credit reports serve as a risk management tool to help determine an individual’s creditworthiness.
Credit reporting agencies are businesses and therefore charge both consumers and credit and loan providers for use of their services. Credit reporting agencies are not government run but are regulated by federal and provincial law.
How do These Agencies Work?
Here’s a breakdown of how credit reporting agencies collect and then report your personal credit information.
- Lenders and creditors report your credit habits to either one, or both, credit reporting agencies.
- The credit agencies also collect information concerning your credit history from public records. This includes information about legal judgements, liens, insolvencies, bankruptcy, consumer proposals and debt management programs.
- Lenders and creditor do not have to report all of your credit information to both agencies, typically a creditor will report to one agency.
- Once a month your credit activity is reported to the credit agencies and then your credit report is updated or created.
- Keep in mind that the credit reporting agencies rely on the information provided to them, if they accidentally report false information, they assume no responsibility. But of course, you can go through the error disputing process to get the mistake corrected.
- Once you’ve used credit, and a credit file is opened in your name, other potential creditors and lenders can now request to see your credit report (this is called an inquiry, click here for more information).
- This is how your creditworthiness is calculated.
Simply put, credit reporting agencies collect credit information about consumers from lenders and creditors, create a report, and then provide that information back to those same lenders and creditors to help them determine who they can grant new credit to.
What Services do These Agencies Provide?
As we discussed above, credit reporting agencies provide consumers, lenders, and creditors with credit reports, a file that contains information concerning an individual’s credit habits and history. Aside from this, they also offer other credit information tools and services.
- Credit Score. This is a 3 digit number that is created based on the information contained in your credit report. Credit agencies create this number to help lenders and creditors decide whether or not they can provide you with new credit. This number is based on 5 main components: history of payments, total debts, credit length, diversity of accounts, and new inquiries.
- Credit Monitoring. Both credit reporting agencies provide consumers with a credit monitoring service. This service allows a consumer access to their credit report and credit score, typically through an online account. Consumers can keep an eye out for identity theft, correct errors and receive alerts when information is changed on their credit report.
How Can a Credit Reporting Agency Help You?
It’s safe to say that the majority of your financial life revolves around your credit history and credit score. Credit reporting agencies can provide you with the information you need to keep your finances on track, build your credit score and even recover from past financial mistakes.
Credit reports, credit scores, and credit monitoring services are all provided by credit reporting agencies. If you’re looking to build your credit, these are the products you need to do so. They can help you find errors and figure out what areas of your credit life need to be improved.
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Margaret Johnson is in the business of helping Canadians tackle their debt, deal with credit issues, and regain control of their finances.