Here’s how credit reporting typically works:

• Data Collection: Credit reporting agencies (also known as credit bureaus) such as Equifax, TransUnion, Schufa, Findeks etc., gather information from various sources, such as banks, credit card companies, mortgage lenders, and other financial institutions. They also collect data from public records, like court judgments and tax liens.
• Credit History Compilation: The collected data is used to create a detailed credit report for each individual or business. This credit report includes information about credit accounts, payment history, outstanding debts, credit inquiries, and any negative financial events.
• Credit Scores: Credit bureaus use the information in credit reports to calculate credit scores. Credit scores are numerical representations of an individual’s creditworthiness. They provide a quick way for lenders to assess the risk associated with lending money to a particular person or business. FICO and VantageScore are two of the most commonly used credit scoring models.
• Access by Lenders: When someone applies for a loan or credit card, the lender typically requests their credit report and credit score from one or more credit bureaus. This information helps the lender determine whether to approve the application, the terms of the credit, and the interest rate.
• Monitoring and Updates: Credit reports are regularly updated to reflect changes in an individual’s or business’s financial activities. Positive behaviors, such as making on-time payments, can improve one’s credit score, while negative behaviors, such as late payments or defaults, can have a negative impact.
• Consumer Access: Individuals have the right to access their credit reports and can request a free copy of their report from each of the major credit bureaus annually. They can also review their credit reports for errors and dispute any inaccuracies.

Credit reporting plays a critical role in the financial system, as it helps lenders and creditors assess risk, set interest rates, and make responsible lending decisions. It also enables individuals and businesses to build and maintain good credit, which is essential for obtaining favorable financial terms and access to various financial products and services.