Credit Rating Agency vs. Credit Bureau: What's the Difference?

Credit Rating Agency vs. Credit Bureau: An Overview

It is easy to confuse credit bureaus and credit rating agencies, especially since credit bureaus are sometimes called "credit reporting agencies." The basic difference is whose creditworthiness they rate. Credit rating agencies judge the creditworthiness of entities like corporations and their debt issues, such as bonds. Credit bureaus collect information on individual consumers to determine how creditworthy they appear to be.

How a Credit Rating Agency Works

Credit rating agencies attempt to assess the financial strength of debt issuers, such as corporations, and of their individual debt offerings, for the benefit of investors and other interested parties. The ratings are typically commissioned by, and paid for by, the issuers themselves.

The three major international credit rating agencies are Fitch Ratings, Moody's Investors Service, and S&P Global. Another major ratings agency, A.M. Best, specializes in the insurance industry.

Their ratings are based on information about the company's finances, its industry, and the markets in which it operates, among other factors. The ultimate goal is to gauge the likelihood that the borrower will be able to repay its debts. S&P Global characterizes credit ratings as "forward looking opinions about an issuer's relative creditworthiness."

The U.S. Securities and Exchange Commission likewise stresses that a credit rating is essentially a well-educated guess, cautioning investors that, "You should not interpret a credit rating as investment advice and should not view it as a recommendation to buy, sell, or hold securities. A credit rating is not a guarantee that a financial obligation will be repaid."

While their ratings scales differ somewhat, all of the agencies issue their ratings in the form of letter grades, with AAA being the highest and signifying the lowest risk, in that agency's opinion. Some ratings go as low as D.

The rating agencies regularly re-evaluate companies and their debt and adjust their ratings accordingly. Rating agencies also rate local, state, and national governments that issue bonds or other debt.

How a Credit Bureau Works

Credit bureaus collect information on individual consumers, which they compile into credit reports and sell. The information in credit reports is also used to create credit scores for individuals. Both credit reports and credit scores are of primary interest to prospective lenders, such as credit card companies, but they may also be used by employers, insurance companies, and even landlords to assess how risky a particular person might be to do business with. The industry is dominated by three major credit bureaus: Equifax, Experian, and TransUnion.

Mortgage and auto lenders, credit card companies, and other businesses with which a consumer has a credit relationship may supply information on them to the credit bureau, such as whether they are making their payments on time, whether they've defaulted on a debt, and so forth. All of that information will go into the individual's credit report . Credit reports do not contain information about the person's income or assets.

Credit scores, which are derived from the information in credit reports, are three-digit numbers, typically ranging from 300 to 850. The higher the number, the less risky the person is judged to be. So someone with a high credit score is likely to find it easier to obtain credit and at better interest rates that someone with a lower score.

Credit scores take into account a number of factors. FICO scores, the most widely used system, are based on five factors that are assigned different weights. The two most important are credit history (basically how reliably you pay your bills) accounts for 35%, and amounts owed (particularly your credit utilization ratio, or how much outstanding debt you have as a percentage of all the credit currently available to you) is another 30%. The remaining 35% consists of the length of your credit history, how much new credit you have, and your credit mix (having several kinds of credit, such as a car loan and a credit card is considered a plus).

Note, however, that there are multiple versions of FICO scores, some tailored specifically to certain types of lenders, such as banks or credit card issuers. In addition, a FICO competitor, VantageScore, has its own scoring models that are similar but use slightly different weightings.

The Bottom Line

Credit rating agencies and credit bureaus are both in the business of evaluating the creditworthiness of entities like corporations or governments (in the case of credit rating agencies) or individuals (in the case of credit bureaus). While their methods are sophisticated, their ratings represent well-informed opinions that are not always perfectly predictive.