As people borrow and repay money throughout their lives, they’re showing the world how financially responsible they are. Credit Bureaus are listening, and gathering data about payment histories – tracking people throughout their lives. That’s the goal anyway, but a credit bureau can’t magically track people.
Many lenders want use credit histories to make decisions about risk. To avoid the huge and complicated task of reporting information directly to each other, lenders report your payment history to the credit bureau. Lenders have a huge interest in getting an accurate picture of your risk. This is a situation that benefits both the lender and credit bureau.
Lenders report your payment history voluntarily to each other through credit bureaus, who compute your history of making payments on time and completely repaying loans on time. The computation is unique to each credit bureau and produces a number called a Credit Score. Your credit score is a single number – lenders purchase that number and use it to compare risk between individuals.
A credit bureau can make sure each lender is legitimate, but can’t verify the reported information is accurate. A bad credit rating due to inaccurate data reported to a credit bureaus (or inaccurate matching at the credit bureau) can have devastating effects on an individual. Each credit bureau has different ways for an individual to dispute bad data, and there are consumer-protection laws in place that try to help normal people force corrections when the credit bureaus are distributing bad data.