Have you ever wondered why there is a difference between your interest rate and your best friend’s? Well, mystery solved: the infamous credit bureau. A credit bureau is a financial information institution that gathers data about an individual’s credit behavior and reports it to lending companies so they can make a smart decision about lending money to relatively complete strangers.
Think about it. If you ask a person for money, your possible loaner will ask around about you, how well you pay, how often do you ‘forget’ your payments, and, in sum, whether it is safe to give you the money or not and how expensive this decision will be.
Is Credit Bureau a Bad Institution?
Not at all. The experts from Caminofinancial tell us that it’s a common misconception that credit bureaus are responsible for accepting or rejecting credit requests but the reality is far from that. In fact, a credit bureau is a private company that collects data from banks, mortgage lenders, credit card institutions, and small loaners.
Sometimes, they even collect data from rent brokers, debt collection agencies, cell phone provider companies, utilities, and public records such as court records. This way, they can have the whole picture of your payment behavior.
Mainly, these companies collect all the available data to elaborate a credit report, which they share with any financial institution that requires it. They can even provide this service for you if you need it.
There are three main credit bureau companies in the United States that you probably heard about: Equifax, Experian, and TransUnion. Even though these are quite famous, there are many other smaller ones that have the same function.
What’s in it for you?
Whenever a financial company gets a credit request, they check the information that the credit bureau has about you in order to “get to know you” and understand your credit behavior. So being in the credit bureau isn’t necessarily a bad thing. It just means that you have, in the past o currently, acquire a credit.
Think of it this way: Would you lend money to your cousin even though he never paid back the money he asked your mother a year ago? Definitely no. Would you lend money to a friend who asked you for some cash in the past, and even though he paid back, it took him four years and a lot of phone calls to terminate the debt? Probably, but under certain conditions to protect yourself.
But, what if your sister asks you for some money and promises to pay you back the same way she has done it in the past? On-time and without any drama. You wouldn’t even think about it, right?
The bank is in the same position as you are in these examples, but since the financial institution doesn’t know you personally, they ask the credit bureaus for your records. The institution would lend cheaper money to your sister and way more expensive one to your cousin. Smart decision, right there.
So, the better your behaviour, the best terms you’ll find in your next credit or loan request. And if you don’t take care of your credit history, you’ll receive the opposite.
If you aren’t in a credit bureau…
This means, plain and simple, that you’ve never had a credit or a loan on your name. Not for your residence, your phone or even student loans. You are a bit of a ghost for the banking system.
If you are not in any credit bureau, the bank will assess the risk as an unknown individual and your conditions might not be great. It’s like lending money to a guy on the street that you know nothing about.
This is why it’s important to build your credit history. And the only way to do it is… asking for a loan or credit to a financial institution. And, of course, paying on time so that you get a good credit history and then, a good credit score.
Talking about credit scores…
As said before, there are different credit bureaus that score credits. You can check your score in the three most common credit bureaus and you’ll find small differences in the final score. That’s because each has its own methodology and algorithms and take different factors into account. But the one thing all of them have in common is the score range.
This is how they’ll rate you:
- Excellent: 800 points or higher
- Very good: 740 to 799 points
- Good: 670 to 739 points
- Fair: 580 to 669 points
- Poor: 300 to 579 points
In general, the scores take into account that you pay on time every month, how long you’ve been using the credit, that your debt is no higher than 30% of your income and that you don’t have a bunch of credit lines.
If you are considering asking for a loan and the financial institution requires your credit score, but you don’t know it, don’t worry. Getting it isn’t hard at all. You can even use free services to pull up the three scores from the credit bureaus. You’ll just need to provide your email address, your basic personal information, and the last four digits of your social security number.
An extra tip: it would be a good idea to take all three scores so the lender has all the data right there and then.
Have always in mind that good credit score will open the doors for bigger and better credit opportunities, and a poor one will limit your chances of qualifying for a loan, buying a home, or even purchasing supplies for your business.
A credit bureau will gather the best and the worst part of your credit behavior and will play an important role in the decision making of a financial institution when you request a credit line. But will never take an active part in that decision. It’s only a data-gathering agency and you’ll also be able to revise your score to make a better decision when it comes to asking for borrowed money.