A:

Individual consumers and corporations both carry credit scores and credit history reports that illustrate to lenders how a borrower manages debt. For individual consumers, a credit report is maintained by credit bureaus, of which there are three agencies: TransUnion, Equifax and Experian. For businesses, credit analysis and rankings are determined and maintained by credit rating agencies, of which there are many, but three are well-known agencies in the industry: Moody's, Standard & Poor's and Fitch. While each tracks creditworthiness, consumer credit reports look much different from those reflecting businesses.

Credit Bureaus

Credit bureaus that rate consumer credit histories sell the information to creditors such as banks, credit card companies or other entities needing to know a consumer's creditworthiness. When a credit product is issued, the lender reports information to the credit bureaus about how the borrower manages the credit. This includes what the agreement is, how well the borrower has met the terms and the loan balances. Then, when the consumer applies to another lender for more financing products, the new lender can evaluate risk associated with the consumer based on previously reported credit history.

Each credit bureau calculates a credit score that is determined by proprietary formulas belonging to each company. These calculations are very similar in nature but usually all result in different credit score numbers. The main categories that determine a consumer's credit score are payment history, tally of debts, length of credit history, types of credit used and new accounts. The payment history and tally of debts categories make up nearly two-thirds of the credit score with their heavy weightings. It is important to remember that, while the credit bureaus may rank these categories one way, a lender receives the full report and makes judgments based on its own criteria.

Credit Rating Agencies

Credit rating agencies were established to give objective evaluations of business' finances so investors could accurately assess risk associated with corporate debt securities. These agencies also analyze and rate the debt of government agencies and municipalities to give insight to individual and institutional investors on the respective finances for each. Each company has its own rating system to rank each debt or fixed income security using some form of A-D scale. Standard & Poor's, for example, issues a high rating of AAA and low rating of D, while Moody's issues a high rating of Aaa and a low rating of C.

While ratings are not required for debt or fixed income securities, having each issue rated by one or more of the credit rating agencies increases the security's marketability to investors. There is some debate on the reliability of the ratings, since the issuers pay a fee directly to the credit rating agency for the analysis. Regardless, the ratings reports provide valuable analyses investors would otherwise have to spend huge amounts of time to collect themselves.

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