If you’ve borrowed money in the past, you probably know creditors, such as credit card issuers and banks, look at your credit score to determine whether to approve your application. But credit scores don’t just appear out of thin air. Instead, they’re calculated based on information from your credit history, which is summarized in a document called your credit report.

Thankfully, you aren’t responsible for creating a credit report and giving it to creditors so they can calculate your credit score. It would be a big burden to keep track of this information. And it wouldn’t help creditors, either, because you could just leave out negative information.

Instead, credit bureaus track your credit history for you. But what exactly is a credit bureau and how do they get information about your credit history to build your credit report? Here’s what you need to know.

What Is a Credit Bureau?

A credit bureau is a company that collects and stores credit information about individuals, says credit expert Netiva Heard, founder of MNH Financial Services Inc. These companies package the information they collect as products and services, such as credit reports and credit scores.

Then they sell those products and services to credit card issuers, lenders and others to help them make decisions about such things as applications for credit cards and loans. “Think of a credit bureau as an information intermediary,” says personal finance expert Kyle Kroeger, founder of Millionaire Mob.

Who Are the Major Credit Bureaus in the U.S.?

The three major credit bureaus in the U.S. are Equifax, Experian, and TransUnion. These bureaus aren’t government agencies. Rather, they’re private businesses that seek to profit from the information they gather about you. Equifax is the oldest of the major credit bureaus, dating back to 1899. TransUnion started in 1968, and Experian in 1996.

In addition to these major bureaus, there are credit reporting agencies. These bureaus typically provide specialized information to various sources. Some of these bureaus include Innovis, LexisNexis, Pay Rent Build Credit (PRBC), and ChexSystems. Many of these alternative bureaus focus on a particular niche, such as rental history or banking history. While these other bureaus are important, you should focus on the major three credit bureaus when it comes to credit applications.

How Do Credit Bureaus Work?

As explained by Heard, creditors voluntarily share information about us to the credit bureaus, such as:

  • When you applied for an account.
  • Whether you were approved for an account.
  • When an account was opened.
  • Whether you paid your bills on time.
  • How much credit you were given.
  • How much of the available credit you used.

While many companies will report your credit information to all three major bureaus, some send information to just one or two of the bureaus. The credit bureaus don’t share information with one another, so your reports will differ based on the information they receive from your creditors. 

“Data collection is of the utmost importance for credit bureaus,” Kroeger says.

After a credit bureau gathers information about you, it adds that information to your credit report. Your credit report includes your Social Security Number and name to identify you; no two people share a credit report, even if they share a name. Contrary to common myth, you and your spouse don’t have a joint credit report. 

How Do Credit Bureaus Make Money?

The credit bureaus make money by offering the data they collect as a variety of products and services, Kroeger says. After a credit bureau generates your credit report, it sells that information to buyers, including the same creditors that reported your information in the first place. 

Credit bureaus often take your credit information one step further and produce a three-digit credit score based on their formula. They sell the scores to various creditors, such as credit card issuers and lenders. Hundreds of credit-scoring models are available, but the most common are FICO and VantageScore. 

In addition to making money by selling credit reports, scores, and other credit information to creditors, credit bureaus make money selling credit information to consumers. You can purchase your credit report, credit scores, and even credit-monitoring services through the major credit bureaus. Depending on the bureau, you either pay a one-time fee or buy a monthly subscription to access this data.

Why Should You Care About Credit Bureaus and Their Credit Reports?

In a perfect world, the credit bureaus would accurately gather all of your credit information. They then would perfectly compile the information into your credit report — without errors. However, credit bureaus use software and humans, both of which make mistakes. It’s important to know that these mistakes can result in incorrect, and potentially harmful, information being added to your credit report.

The information that credit bureaus collect and sell directly affects your financial future. Therefore, it’s critical to double-check your credit reports to ensure all of the data is accurate. “So many businesses use credit reporting in their decision-making that it has become a necessity to maintain good credit,” Heard says.

Your credit information obviously affects credit decisions, but it also might affect other things. It can be a factor in your rental application for an apartment, your auto insurance rates, and even your ability to get a job.

How an Error on Your Credit Report Could Cost You

If negative, incorrect information appears on your credit report, your credit score could go down. Depending on how it damages your score, you might not get the best rates for a credit card or might not qualify for a loan.

Getting a slightly higher interest rate on a credit card, for instance, might not seem like a major deal. But even a small difference in the interest rate affects how much debt you accrue, and how long it takes to erase it. 

Let’s take a look how this works.

So, imagine you have a credit card with an interest rate (APR) of 17%. It would take monthly payments of $178.26 to wipe out a $5,000 balance in three years (if you pay no fees and don’t put more purchases on the card). If you paid off the balance right away, you could avoid $1418.53 in interest costs.

Now, let’s consider the same scenario for a card with an interest rate (APR) of 20%. It would take monthly payments of $185.82 to wipe out a $5,000 balance in three years (if you pay no fees and don’t put more purchases on the card). If you paid off the balance right away, you could avoid $1689.42 in interest costs.

As you can see, you could save at least $270.89 in interest if you paid off the 17% balance right away versus the 20% balance. Of course, the interest savings between the two cards would be even higher if you pay off the balance over time instead of immediately.

You Can Check Your Credit Reports for Free

Thankfully, you can check your credit reports for free. Under federal law, annualcreditreport.com lets you check your credit reports at Equifax, Experian, and TransUnion once every 12 months for free.

“Their credit reports are very consumer-friendly, easy to read, and organized in a way that is simple and clear and easy to understand,” Heard says.

If you find an error on any of your credit reports, contact the credit bureau to dispute the incorrect information. Provided the information is truly inaccurate, the bureau should remove it.

As an extra precaution, space out your reports throughout the year by ordering one from each bureau every four months. In addition to letting you check for errors more often, this enables you to regularly monitor your credit for signs of fraud. In particular, look for new accounts that show up on your report that you didn’t open. Also check on any credit inquiries you don’t recall.

Understanding Credit Bureaus Is Key to Your Financial Success

Understanding the three major credit bureaus and how they work is key to your financial success. The information they collect and report can greatly affect your financial well-being. This knowledge, when paired with a basic grasp of how credit reports and credit scores work, will help you make smarter financial decisions.