Even people who are financially savvy and who have a good handle on money management sometimes ask me how the credit reporting process works. While it’s one of the most common questions I receive, the explanation of the process is actually pretty simple.
When you take out a loan or line of credit, your creditors report that information to any of the credit reporting bureaus, including Equifax. We take the information reported to us and compile it into a file. When you or potential creditors ask to see your credit history, that file of collected data is what we produce. We also use the information in that file to calculate your credit score.
Simple enough? Let’s break it down even more.
You and your creditors—credit card companies, banks, retailers, lenders, and collection agencies—initiate the credit reporting process. When you open up a credit card, take out a car loan, or start a mortgage, those companies begin to collect information on you regarding the transaction.
Creditors then send a report to one or more of the credit reporting agencies—Equifax, Experian, and TransUnion—that typically includes your identifying information, your credit agreement, and details on when and how you pay your bills, as well as how much credit you have available and whether any of your accounts are delinquent.
Equifax aggregates the information we receive and also gathers information from public records, which reflect things like foreclosures, tax liens, and bankruptcies, to create a complete file. We then compile everything we have collected into a credit file, which lenders can access to help determine if you are a high risk or low risk for credit.
Your credit report
Your credit report is made up of several sections, including your personal information, your lines of credit, any inquiries made into your credit over the past two years, public records, and collection information.
Your credit report is updated frequently with new information and therefore is always changing. Over time, information also falls off your account and is no longer used when calculating your score.
Your credit score
Equifax uses the information on your credit report to calculate your credit score. Your Equifax credit score is made of several factors, but it includes five major sections:
- Your payment history (35 percent)
- The amounts you owe (30 percent)
- The types of credit you have (15 percent)
- The number of new accounts and inquiries (10 percent to 12 percent)
- The length of your credit history (5 percent to 7 percent)
Opening a new credit card, paying a bill, or closing an account can affect your credit report and your credit score.
You’re entitled to one free credit report every year from each of the three credit reporting agencies at annualcreditreport.com. When you pull your credit report, you can also pay a small fee to get your credit score. If you want to keep tabs on your credit report and score more closely, you may want to sign up for a credit-monitoring product as well.
The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.