Credit Reporting: How Does It Work?

In order to determine a consumer’s credit worthiness, creditors and lending institutions have come to depend on credit reporting agencies. Credit reporting agencies supply individual reports that provide consumer specific information for lending purposes. With the advent of technology, most creditors now have automated systems that provide them direct access to credit reporting agencies. In most cases, credit agencies or credit bureaus provide personal, legal, and account history related information. In recent years it has become more common for lending institutions to use multiple credit reports to meet lending requirements. Besides meeting lending requirements, multiple reports also provide additional security measures. Using multiple sources for reporting purposes provides a more comprehensive and complete background check on a consumer’s credit and spending history.

Traditionally, when a consumer submits a credit application, creditors forward that information to the credit reporting agencies. This is how credit reporting agencies are able to accumulate personal information on people. This information often includes items such as the consumer’s name, address, social security number, employment information, marital status, telephone number, and possibly income. By utilizing credit reports, lending institutions are able to cross-reference the information that a consumer provides on a credit application with the information that the credit reporting agencies have on file. Some credit reporting agencies even hire companies and or contractors to research and verify that the information entered on a consumer’s credit application is accurate and verifiable.

Most credit accounts, on a monthly basis, are reported to credit reporting agencies; these reports will reflect a payment and account history for all credit related accounts. The information that a credit reporting agency provides is known to as a tradeline. On a credit report, there is traditionally a tradeline for every creditor that reports account information to the bureaus.

As I mentioned earlier, not all lending institutions report to the credit bureaus; however, most do. The major credit bureaus provide reports which include a consumer’s payment history in 30-day intervals. This is due to the fact that most consumer billing cycles follow a similar payment pattern. Most lending institutions have a proprietary set of rules and guidelines that govern the thresholds at which they report consumers as being delinquent in their payments. It has been my experience that some lenders have gone as far as not report delinquency until the consumer’s account reaches 60 days past due. Other lenders are much stricter in their guidelines and will report delinquency at 30 days past due. Traditionally, a credit report will provide a detailed summary of any delinquency you have had with your creditors. This is measured by the number of times that you fallen more than 30, 60, 90, and 120 days past due. Many of these credit reports use a rating system that assigns a specific status code to each 30-day period of missed payments.

In the consumer lending industry, this method is often referred to as the simple method. For example, an R-1 rating represents a consumer account that is current or an account that was paid properly and that is in good standing; an R-2 rating indicates that payments were paid 30 days or more after the due date but less than 60 days after the original due date; an R-3 rating represents that the bill was paid 60 or more days after the original due date but is less than 90 days past due; an R-4 rating shows that a consumer has fallen 90 or more days past due but is less than 120 days delinquent; an R-5 rating indicates that a consumer has fallen 120 or more days past their original due date; an R-7 rating shows that a creditor was forced to repossess collateral on the account and an R-8 rating means that the account was referred to collections in an attempt to recoup payment. The rating of R-9 is traditionally used to show that a debt or debts have been discharged through bankruptcy, have been repossessed or foreclosed upon, or are currently in collections.