How credit rating agencies work

Have you ever owned a charge card or applied for a financial loan, then you’ve a credit rating. Your credit report is compiled and maintained by companies known as credit rating agencies or credit agencies. Credit rating agencies collect your credit report from charge card companies, banks, mortgage companies along with other creditors to produce an in-depth credit history. The data for the reason that report can also be accustomed to calculate a 3-digit credit rating.

Any time you make an application for credit, the financial institution or charge card company calls up a number of these credit rating agencies to examine your credit score and credit rating. The lender will decide whether or not to extend a loan — and also at what rate of interest — largely in line with the credit rating as reported by individuals agencies.

Credit rating agencies are effective institutions. One bad entry on your credit score can cripple your borrowing power for a long time. A whole lot worse, credit history are frequently requested by employers, landlords and insurance providers. This is exactly why it is so vital that you make certain that everything on your credit score holds true and accurate. Based on a 2004 study, one inch every four credit history contains serious errors: financial obligations wrongfully listed as delinquent, closed accounts listed as open, financial obligations owed with other people with similar name, etc [source: MSNBC].

For many years, the data collected by credit rating agencies was hidden from consumers. Individuals was clueless that why these were denied credit or whether their reports contained mistakes. Starting with the Fair Credit Rating Act in 1971 and ongoing with recent legislation, U.S. citizens have free use of their credit history and credit ratings from each one of the three national credit rating agencies: Experian, TransUnion and Equifax. Citizens also provide the authority to know precisely why their credit was denied.

Within this HowStuffWorks article, we’ll let you know that the "Big Three" credit rating agencies work, your legal rights when confronted with them, and the way to safeguard yourself against errors and fraud.

Let us begin with the large Three.