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Peeking Inside The Credit-score Machine

There are three little numbers that can alter your life.

Will you qualify for the mortgage? Will the dealership give you the car loan? Are you going to get the 10 percent or the 25 percent APR on your credit card? Your credit scores as factored by the three major credit bureaus -- Experian, TransUnion and Equifax -- can determine the answers to these questions.

Credit bureaus operate in complex ways, but a new study published by the federal Consumer Financial Protection Bureau sheds some light on their inner workings. The study, said to provide the most comprehensive look into credit reporting to date, provides insight into who is reporting to the bureaus, why complaints are made and how well consumers are monitoring their credit.

Consumers ignore free credit reports

Despite a federal law requiring the three major credit bureaus to provide consumers a free credit report each year, most fail to take the government up on the offer. The CFPB found only 44 million people -- about 20 percent of consumers -- requested their file in 2011.

Those that did look at their credit report filed disputes for 32-38 million items on their files. In about 40 percent of those disputes, debts in collection were at issue.

Unfortunately for consumers, who may think their dispute will get a third-party review, the vast majority of complaints simply get forwarded to the company that furnished the data on the report. Only 15 percent of disputes are resolved internally by credit bureaus. The rest are sent for review by the company supplying the account information to the bureau.

Credit cards a major influencer

For anyone trying to build up their credit, it might be worthwhile to know that credit card companies furnish more than half of the payment data being sent to credit bureaus. According to the CFPB study, information received by the bureaus can be broken down to the following major sources:

  • Bank cards, such as general credit cards issued by Visa and MasterCard: 40 percent
  • Retail credit cards: 18 percent
  • Mortgage lenders or servicers: 7 percent
  • Auto lenders: 4 percent

In addition, only a few companies are providing credit bureaus with the majority of the information they receive. The study found 57 percent of the trade lines being reported to the bureaus came from the top 10 data furnishers. More than three-quarters of all data being provided to the credit bureaus came from just 100 sources.

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