How Does the
Credit System Work?

It doesn't have to be you alone fighting against the credit system.

There are a number of professional credit repair organizations that can help you work towards a fair and accurate credit score.

Many thousands of people have already taken advantage of these credit repair services and with the help of a company with experience dealing with the credit system, have seen their credit scores jump a hundred points or more in a matter of a few months.
When you apply for a loan or credit card, the provider of these services will typically request a copy of your credit reports. These reports contain information about your history of using credit as well as your current financial situation. The information in your reports will be used to create a credit score that lenders will take into account when determining whether or not provide you with credit. This documentation of your credit history is an integral part of the modern consumer financing industry and is a major factor in deciding whether or not you will be able to purchase goods and services on credit, but where does this information come from?

Credit reporting started many, many years ago with banks, shopkeepers, and anyone else who extended credit to customers. These lenders would record information about people such as whether or not they had repaid their debts in the past and keep it on file in case the customer again requested credit.

The biggest shortcoming here was that lenders only had information or a small number of people. In order to make more intelligent decisions about prospective borrowers that lenders had not dealt with before, lenders needed the information that had been recorded by the other lenders the borrower had worked with in the past. This opened up an opportunity for organizations that would eventually evolve into what we not call credit bureaus. These credit reporting agencies would collect information about borrowers from multiple sources and combine that data to form a single credit report for the borrower. Then, when the person applied for credit again in the future, the new lender could purchase a copy of their credit report from the credit reporting agency and use it to determine if the applicant was credit worthy.

Over time, these various credit reporting agencies, merged or bought each other out until we reached the situation we have today where there are three major credit bureaus that collect financial information about the majority of adults across the country.

The Components of the Credit System

Today's consumer credit system is an institution based on the sharing of information between a number of entities.

Credit Reporters

Credit reporting starts with the lenders, credit card companies, collections agencies, courts, etc. that have financial information about you. Typically, these are the organizations you owe money to so they know how much you owe and how prompt you have been with making your payments. In the case of the courts, they have record of and legal procedures you have been involved with such as a judgment or a bankruptcy.

Credit Bureaus

The credit reporters provide the information they have about you to credit bureaus. The credit bureaus collect all this information and assemble it to create your credit report. They are responsible for the ongoing maintenance of your credit report. As new information is reported to them, they add it to your report. As information ages, the credit bureaus are responsible to remove it from your credit reports once it reaches the reporting limits defined by the Fair Credit Reporting Act. Typically, negative information can only remain on your credit reports for up to 7 years.

The credit bureaus are for profit companies that make their money by selling the information in your credit reports.

Credit Report Users

There are a number of people who use the information in your credit reports. Marketers use this information to find the best people to sell their product to. Employers use your credit scores as an indicator of the type of employee you would be. Auto insurance companies use the information in your credit reports as an indicator of how likely you are to file an insurance claim.

But the most common use of your credit reports, and the reason why the credit reporting system grew into what it is today, is by lenders to determine your credit risk.

Consumers

Even though credit reports contain information about consumers, the consumer is often the forgotten part in the credit reporting system. But that is not to say you don't have a roll.

It is up to the consumer to make sure the information in their credit reports is accurate and a fair representation of their true credit risk. At no other part of the process is the information that gets added to your credit reports verified to be accurate. Credit reporters tell the credit bureaus what to report, the credit bureaus add that information to your credit reports, and credit users rely on that information to make very important decisions about you, but nobody is required to prove that the negative things that are said about you are accurate. That it why it is so important for the consumer to get involved with the management of their credit. It is your responsibility to order copies of your credit reports and repair your credit when there are problems. Nobody will do it for you.