What is a Credit Bureau and How Does it Work?

A credit bureau is an important entity in the financial landscape, acting as a repository of consumer credit information. Credit bureaus serve as a centralized platform where lenders, such as credit card companies, banks, creditors, and other financial institutions, report an individual's credit-related activities. These activities include loan repayments, credit card usage, and debt obligations.

Credit bureaus have a pivotal role in facilitating trust and efficiency within the lending system. By providing lenders with comprehensive insights into an applicant's credit history, they can make informed lending decisions, promoting responsible lending practices and reducing the risks of extending credit.

Whether you're building credit or applying for a credit account, you'll likely interact with one of the major credit bureaus. We dive into what credit bureaus are and how they work to help you understand the importance they play in your financial journey.

The major credit bureaus in Canada and what they do

Equifax and TransUnion are the two major credit bureaus dominating the Canadian financial industry. These credit bureaus gather data when financial institutions like credit card companies report credit activity to create comprehensive credit reports and credit scores for individuals. These reports contain virtual information about an individual's credit and payment history.

Banks and other financial institutions use one of these credit bureaus to assess the creditworthiness of potential borrowers and make informed lending decisions. The reports provide valuable insights into the potential borrower's financial behaviour, outstanding debts, and credit utilization.

In addition to providing credit reports, credit bureaus also calculate credit scores based on the information in the reports. Credit scores are numerical representations of an individual's creditworthiness, typically ranging from 300 to 900. Higher credit scores indicate lower credit risk, making it more likely for you to qualify for loans and credit cards with favourable terms and interest rates.

The major credit bureaus also offer services directly to consumers, such as free credit reports. You can access your credit report to monitor your profile and review the information for inaccurate or incomplete information. You can also sign up for credit monitoring services, which alert you to changes or suspicious activity on your credit report, such as identity theft or fraudulent accounts.

Credit bureaus vs. credit reporting agencies

The terms credit bureau and credit reporting agency are often used interchangeably but have slightly different nuances. Credit bureaus collect and maintain databases of consumer credit information to create credit reports for individuals. They play a crucial role in the lending process by providing lenders with valuable insights into a potential borrower's creditworthiness.

A credit reporting agency is a broader term for organizations responsible for collecting, organizing, and analyzing consumer credit information. Credit bureaus are a type of credit reporting agency in addition to credit monitoring services and credit scoring companies. Credit reporting agencies serve as intermediaries between lenders and consumers, facilitating the exchange of credit information and promoting transparency and fairness in the credit industry.

Where do credit bureaus get their information?

Credit bureaus gather information from various sources, including:

• Lenders and financial institutions: This is the primary source of credit information for credit bureaus. Lenders and financial institutions regularly report consumers' credit activities, such as data on loans, credit cards, lines of credit, and other forms of credit.

• Public records: Credit bureaus can obtain information from public records, such as bankruptcy filings, court judgments, tax liens, and property records.

• Utility companies: Some credit bureaus collect data from utility companies, such as electricity, water, and telecommunications providers.

• Collection agencies: Your accounts are sent to collection agencies when you fail to repay debts. These agencies may report the account collection to credit bureaus, including payment arrangements and settlements.

• Creditor's internal records: Some creditors may share internal data with credit bureaus, such as account status updates, changes to credit limits, or account closures.

• Credit reports from other bureaus and credit agencies: In some cases, credit bureaus may share information with each other to ensure the accuracy and completeness of an individual's credit report.

What types of information are on credit reports?

Credit reports contain a variety of information that provides a comprehensive overview of your credit history and financial behaviour. Here's a list of information that can appear to help you understand your credit report:

• Personal information, including your full name, date of birth, addresses, and Social Insurance Number.

• Credit accounts list the credit cards, loans, mortgages, lines of credit, and retail accounts with information about the account type, date opened, credit limit, loan amount, current balance, and payment history.

• Payment history is a detailed record of your payments for each credit account, indicating whether payments were on time, late, or missed.

• Hard credit inquiries happen when you apply for credit, and it can impact your credit score.

• Public records show information from bankruptcies, tax liens, foreclosures, and court judgments.

• Account collections, with information about the collection agency, the original creditor, and the amount owed.

• Credit utilization ratio to show how much of the total credit limit you used.

• Credit account status, including whether each account is open, closed, in good standing, delinquent, in default, or charged by creditors.

Why are credit scores and credit reports important?

Credit scores and credit reports are important representations of your creditworthiness and play an important role in the lending process. Creditors report consumers' financial behaviours to credit bureaus, which appear on credit reports to provide a three-digit credit score for consumers.

Credit scores directly influence the interest rates offered to borrowers. Individuals with higher credit scores typically qualify for lower interest rates, saving them money on interest payments over the life of a loan.

A positive credit history and high credit score are also crucial for accessing credit products and financial opportunities. Whether it's applying for a mortgage, financing a car, or securing a credit card, a good credit score and a clean report increase the likelihood of approval and favourable terms.

Some companies may also access your credit score and credit report as part of a background check when applying for housing or a new job. Landlords and property management companies often review credit reports as part of the tenant screening process. Employers typically assess your credit score if your position involves financial management and access to sensitive information.

Personal information collected by credit bureaus

Credit bureaus and consumer reporting agencies collect various personal information to accurately identify individuals and maintain comprehensive credit reports. Lenders use your personal information to verify your identity when you apply for credit, rental housing, or employment. The personal information collected typically includes:

• Your full legal name, including middle name and initials

• Your date of birth

• Your Social Insurance Number

• Information on your current and past employment

• Phone numbers associated with you, such as home, work, and mobile phone numbers

• Driver's license number

• Identification documents, such as a passport

Does pulling my credit report impact my credit score?

There are two types of credit checks: soft and hard inquiries. A soft inquiry doesn't impact your credit score. You can initiate a soft inquiry to review your credit information. A financial institution may also initiate a soft credit inquiry to pre-approve you for credit offers. Soft inquiries don't appear on your credit report or affect your credit score.

A hard credit inquiry is initiated by a lender or financial institution as part of a credit application or a request for additional credit. Hard inquiries can have a minor, temporary effect on your credit score. However, healthy credit management skills can help your score increase shortly.

How do lenders use information from credit bureaus?

Lenders use the information from credit bureaus to make informed lending decisions. Credit reports help them assess your credit risk and whether they want to extend credit. Individuals with higher credit scores have a higher chance of getting approved for a loan application. Higher credit scores also have a better chance of qualifying for lower interest rates and more favourable terms, like lower monthly payments.

For credit cards and revolving lines of credit, lenders use credit reports to assess the appropriate credit limit for an individual. Applicants with stronger credit profiles may have higher credit limits, providing greater purchasing power and flexibility.

A lender or organization needs credit report authorization to access your credit report. Whether you're applying for new credit, an apartment, or a new job, the company typically provides notice that they are requesting your credit report.

Other accounts included in a credit report

In addition to your credit history, credit accounts may also include information about other types of accounts and financial obligations:

• Retail accounts that offer credit for purchases

• Installment accounts

• Mortgages

• Student loans

• Home equity lines of credit

• Payments and outstanding balances or collections for utility accounts

• Cellphone accounts

• Rent payments

• Child support and alimony

These accounts provide lenders with a more comprehensive view of your financial situation.

Why is it important to dispute inaccurate or incomplete information on your credit reports?

Disputing inaccurate or incomplete information on your credit reports is crucial for several reasons. Your credit report is a reflection of your financial history and identity. Errors and incomplete information can paint an inaccurate picture of your creditworthiness. By disputing errors, you ensure your credit report accurately reflects your situation to give you the best chance at securing financing.

Errors in your credit report can harm your credit score. For example, if a credit account is incorrectly reporting late or missed payments or if there are unauthorized accounts opened in your name, your credit score may suffer. Disputing these errors prevents unnecessary damage to your credit score.

Inaccuracies may indicate identity theft or fraud. For example, if you see a credit inquiry you don't recognize, it may indicate someone has used your identity to open a credit account. Review your credit report regularly and check for concerns so the credit bureaus can investigate suspicious activity.

Under the Fair Credit Reporting Act, consumers have the right to dispute inaccurate or incomplete information on their credit reports. The Federal Consumer Agency of Canada, a consumer protection bureau in Canada, also enforces laws governing the financial industry and protection of consumer rights. Exercising your rights ensures consumer credit reporting agencies investigate and correct any concerns promptly.

How can I get a copy of my credit report?

You can obtain a copy of your free credit report from a credit bureau annually online, by mail, or over the phone. You can also pay for a credit report to review your credit profile. Some financial institutions also provide free copies of your credit report to help you self-monitor.

Online

Requesting a copy of your report online is the quickest and most convenient way to get your information. Each credit bureau has a website where you can order your credit report securely. You may be required to provide personal information for verification purposes, such as your name, Social Insurance Number, and date of birth.

By mail

To request a copy of your credit report by mail, you need to download and complete a request form from the website of each credit bureau. Fill out the form with your personal information and mail it to the indicated address. You may be required to provide copies of identification documents, like a driver's license or passport.

Over the phone

Some credit bureaus offer a toll-free phone number you can call to request a credit report. You'll need to provide your personal information for verification purposes. The credit bureau will mail the report to you.

KOHO can help you build credit and reach your financial goals faster

Credit bureaus collect valuable information about your creditworthiness and credit history. When you apply for credit with KOHO, such as a virtual credit card or a secured line of credit, we report your account activity to the credit bureaus in Canada.

Positive credit behaviour, such as timely payments and low credit utilization, can boost your credit score and help you qualify for additional financing. If you're worried about going over your available credit, you can apply for overdraft protection coverage.

Request a copy of your free credit score to ensure you're progressing in your credit-building journey. Your credit report has valuable insights into positive and negative remarks on your account and recommendations for how you can increase your score.

Learn about KOHO's financial products tailored to every step of your financial journey. Whether you're saving for a house or need a mortgage, we can help you maximize interest earnings and have a strong credit profile to make your goals a reality.