What Is a Credit Bureau?

Credit reports and scores have become a cornerstone of personal finance. Credit cards, personal loans, mortgages -- they all require good credit. Since your credit scores are based on your credit reports, a good or excellent credit score means a healthy credit report.

Credit reports don't grow on trees. You don't get one just for being born, and they're not part of any government service. Instead, credit reports are built and managed by the credit bureaus.

What is a credit bureau? In essence, credit bureaus are reporting agencies that collect credit data. Consumer credit bureaus deal with the data of individual people. Business credit bureaus deal specifically with small business credit data.

There are three major consumer credit bureaus:

• Equifax
• Experian
• TransUnion

In addition to the big three, there are dozens of smaller reporting agencies. But these three are the ones most used by banks and lenders. This guide will explain how credit bureaus work and what impacts they have on your personal finances.

How do credit bureaus work?

Although you might envision clandestine agents skulking about and collecting your credit data, credit bureaus don't really work like that. For one thing, some of the information in your credit reports comes from public records. Your name, address, and other information is often a part of public records.

The information on your payment history and credit use isn't public, so where does it come from? It's still not super spies. That information was actually reported to the credit bureaus by financial institutions you deal with. Banks, lenders, credit card companies -- they all submit regular reports to the three major bureaus.

Which bureau (if any) an institution reports to is entirely up to that institution. Most lenders and card issuers will report to all three credit bureaus. However, some companies may choose to report to just one or two.

Credit bureaus aren't generally required to share information with other bureaus. This means that each of your credit reports could look slightly different. You may have information on one report that isn't on the others, or vice versa.

For example, say you apply for a new credit card. That issuer will check your credit history. Often, issuers will only check one credit report from a single bureau. In that case, you will have a hard inquiry on one credit report that isn't on your other reports.

What information do credit bureaus collect?

Other than basic personal info, the data in your credit reports is all credit related. Your report will have an entry for each credit product you own. This includes:

• Credit cards
• Personal loans
• Auto loans
• Revolving credit lies
• Mortgage loans

Each entry will consist of key information about the product. For instance:

• The type of credit account
• The date you opened the account
• The name of the bank or lender
• The amount of credit (loan size, credit card limit, etc.)
• Your latest account balance (usually reported monthly)
• Your payment history

Non-credit accounts, on the other hand, won't be reported in most cases. This includes personal finance accounts, like your bank account or investment account. Most bills won't be included, either; your rent payments, utility accounts, cellphone plans -- none of that will be reported to the credit bureaus on a normal basis.

But that silence gets broken if you stop paying your bill. If your electric bill goes unpaid for too long or you fall months behind on your rent, your account may be charged off or sent to a collections agency. At that point, it could wind up on your credit reports. Delinquent accounts on your credit reports can then damage your credit scores.

LEARN MORE: Ultimate guide to your credit score

It is worth noting that credit bureaus are starting to expand the type of information they collect -- and how it impacts your credit scores. Alternative credit programs, like Experian Boost and UltraFICO, are incorporating utility and banking data into credit scoring (when you opt in, so far). But these programs are still young and lender adoption is slow.

Who can request your credit report?

In addition to yourself, a number of different parties can legally request a copy of your credit report from any of the credit bureaus. But don't worry about random people checking your credit report. The Fair Credit Reporting Act (FCRA) legally limits who can access your credit reports.

By law, a given entity needs to have a "permissible purpose" to access your report. In other words, only parties with a legitimate business reason to request your report will be given access. This may include:

• Applying for a credit product (credit card, loan, etc.)
• Applying for insurance (home, auto, health, etc.)
• When being "prequalified" for credit or insurance
• Opening a new utility or cellphone account
• Applying for a new apartment
• When you initiate a business transaction
• In response to a legal request (e.g., subpoena or child support case)
• Applying for certain licenses or government benefits

Your employer (or potential employer) may also access your credit reports, but not without your written permission, and your employer will not be able to check your credit scores.

Who can't access your credit reports? Unless you enter into a legitimate business transaction with them, your friends, relatives, or nosy neighbors can't -- legally -- get copies of your reports. If they do obtain a copy using questionable means, you could potentially sue them for damages.

Who regulates the credit bureaus?

Many of the rules governing how credit bureaus operate were set up in the Fair Credit Reporting Act. As mentioned above, the FCRA limits who can request your report. It also requires credit bureaus to give you access to your credit reports for free at least once per year.

If there is a problem or error with your report, the FCRA gives you the right to dispute that error. It also requires the credit bureaus to respond in a timely manner.

In addition to the FCRA, the credit bureaus are actively regulated by the Consumer Financial Protection Bureau (CFPB). This is a government agency that regulates many financial services, including credit bureaus.

What to do if your credit report has an error

The information collected by the credit bureaus is provided to them by the financial institutions. Reporting agencies aren't required to verify the accuracy of that information, though. As a result, you could wind up with old or incorrect information on your reports.

You should file a dispute immediately if you find an error or a fraudulent account. Each credit bureau has an easy online process for filing a dispute. (You can even do it by mail if you like it old school.) If an error appears on multiple credit reports, you'll need to file a dispute with each bureau.

Why are credit bureaus important?

Although the credit reporting and scoring system can be complicated, it has its uses -- especially for lenders, though consumers can benefit from it, too.

Before credit reports, lenders had to mitigate risk by relying on secured loans and collateral. Or it went the opposite direction: relying on your reputation. Perhaps your approval depended on who you worked for -- or who you knew.

Credit reports have helped banks and lenders limit risk without relying so heavily on collateral. If you have a good history of paying your debts, you can often get a credit card or loan without forking over a security deposit.

But all this is not to say that credit bureaus -- and credit reporting in general -- are perfect. You generally need an open credit account to qualify for a credit report and score. This makes millions of people unscorable. The (slow) inclusion of alternative data, like rent and utility payments, is changing things for the better.