What is a Credit Bureau and How Does it Work?

Have you ever wondered how your credit history is evaluated or how lenders decide whether you are creditworthy?

Well, they don't just decide on a whim. They gather all possible information about your borrowing, repayment, debts, and payment history to determine your creditworthiness.

And it's a credit bureau that provides them with this information.

In this blog, we will explore the ins and outs of credit bureaus, their role in financial systems, and the importance of understanding your credit report. 

What is a credit bureau?

A credit bureau is a company that collects and keeps track of financial information about people and businesses. It gathers data from various sources, like lenders and public records, to create credit reports and scores. These reports show a person's credit history, including borrowing and payment records. Credit bureaus help lenders, landlords, and others assess a person's creditworthiness when making financial decisions.

In Canada, two prominent credit bureaus, Equifax and TransUnion, play a crucial role in assessing creditworthiness. These bureaus compile consumer credit information and create credit reports, which they provide to banks and other lenders.

Recommended Reading: How to improve your credit score

What services do credit bureaus provide?

Credit bureaus offer various services to consumers, lenders, and creditors. One of the main services is providing credit reports, which contain information about a person's credit habits and history. 

Additionally, credit bureaus generate credit scores, which are three-digit numbers that help lenders decide whether to provide credit to an individual. These scores are based on factors like payment history, total debts, credit length, new inquiries, and public records. 

Credit bureaus also offer credit monitoring services, allowing consumers to access their credit reports and scores online. This service helps consumers detect identity theft, correct errors, and receive alerts about changes to their credit reports.

What type of information is reported to credit bureaus? 

• Personal Information: Credit bureaus collect your name, date of birth, address, and Social Security number. It helps identify you and ensure accurate reporting.
• Credit Account Information: Credit bureaus gather data about your credit accounts, known as "tradelines." This includes details about your loans, credit cards, mortgages, and other credit facilities. It covers information like the account balance, payment history, credit limit, and any late or missed payments.
• Inquiry Information: When you apply for credit, lenders may request your credit report from the credit bureaus. These requests, called inquiries, are recorded on your report and indicate that someone has accessed your credit information. There are two types of inquiries: "hard inquiries" that occur when you apply for new credit and "soft inquiries" that occur when you check your own credit or when lenders perform background checks.
• Public Record and Collections Information: Credit bureaus also collect data from public records, such as bankruptcies, tax liens, and court judgments. Additionally, they may include information about collection accounts, which are accounts that have been transferred to a collection agency due to non-payment.

Recommended Reading: All You Need To Know About Car Loans in Canada

Can you obtain a free copy of your credit report?

You have the option to obtain free credit reports from the prominent credit bureaus. Equifax, for example, allows you to request your credit report at no cost through various methods such as phone, mail, fax, or in person. Regularly checking your credit report is crucial for several reasons, including verifying the accuracy of your information. Inaccurate or incomplete information may affect your credit scores, and if you come across unfamiliar details, it could indicate possible identity theft.

Use our quick and easy credit tool to check your credit score for FREE with what's known as a "soft check", that won't impact your credit:

What steps should you take when you discover incorrect or missing details on your credit report?

If you come across inaccurate or incomplete information on your credit report, or if there is information you don't recognize, you can initiate a dispute by phone, mail, or fax. If you suspect that the error might be a result of fraud or identity theft, mention this when filing the dispute. Additionally, it is important to contact the company responsible for reporting the disputed information. These actions will help address and rectify any discrepancies in your credit report.

Do the two main credit bureaus - Equifax and TransUnion, determine lending decisions?

No, the credit bureaus are not responsible for making lending decisions. They are not responsible for determining your eligibility for a loan. Instead, they provide lenders with the necessary information to make these crucial decisions. Each lender has their specific criteria and guidelines when it comes to approving or rejecting loan applications.

Do credit bureaus operate under government regulation?

The government does not directly operate credit bureaus, however, they are subject to regulations under federal and provincial laws. The Personal Information Protection and Electronic Documents Act (PIPEDA) is the federal legislation that governs the operations of credit bureaus and ensures the protection of consumer information. Additionally, most provinces have specific regulations in place to further safeguard consumer credit information. These regulations collectively aim to maintain the privacy and security of individuals' credit data.

In conclusion, credit bureaus play a vital role in assessing creditworthiness by providing lenders with credit reports and scores based on an individual's financial history. Having a good credit score comes in quite handy while applying for loans or making big financial decisions. At Approval Genie, we help you secure car financing even if you have a bad credit score. In addition, our financial advisors will help you rebuild your credit score.