A:

It is easy to get credit bureaus and credit rating agencies confused, especially since credit bureaus are sometimes called "credit reporting agencies." To distinguish between the separate purposes of credit rating agencies and credit bureaus, it is useful to look at the type of credit interactions that each involves and how the two report on creditworthiness.

What Is a Credit Rating Agency?

Credit ratings, different than credit reports or credit scores, provide investors with information about the nature of debt obligations, fixed-income securities and the issuers of debt-based investments. Credit ratings are compiled and distributed by information brokers known as credit rating agencies, of which there are three major international players: Fitch, Moody's and Standard & Poor's.

Credit rating agencies arose out of the need for investors to compare the risk-reward potential of certain investments and as a way to gain insight into the financial stability of companies willing to borrow from those investors or issue preferred stocks. Credit ratings are also issued for insurance companies as a way to represent their financial solvency.

Credit ratings are issued in letters, such as AAA or CCC, so that investors are able to quickly look at a debt instrument and gauge its risk. The ratings differ among the three major agencies, so it is important to understand which one is providing the letters. Credit ratings are based on a huge number of variables and involve some market-based, historically estimated, firm-level information. Assessments range from business attributes to underlying investments and are all designed to offer a picture of the likelihood of the borrower to be repaid.

What Are Credit Bureaus?

While credit ratings are compiled primarily for investors about companies and governments, credit reports and credit scores are compiled primarily for governments and lenders about individual borrowers. The agencies that gather and distribute information about consumer creditworthiness are called credit bureaus, or credit reporting agencies.

Coincidentally, the credit bureau industry is also dominated by three large actors: Experian, Equifax and TransUnion. One interesting feature about the credit bureau business model is how information is exchanged. Banks, financing companies, retailers and landlords send consumer credit information to the credit bureaus for free, and then the credit bureaus turn around and sell consumer information right back to them.

Credit bureaus package and analyze consumer credit reports from which credit scores are derived. Unlike credit ratings that are issued in letters, credit scores are issued as a number, typically between 300 and 850. Your credit score impacts the loan amounts you can qualify for, the interest rates you pay on those debts, and sometimes your renting and employment opportunities. You can gain access to your own credit reports, free of charge, once per year from each credit bureau. Both credit rating agencies and credit bureaus are highly regulated and have come under increased scrutiny since the Great Recession of 2007-2009.

RELATED FAQS
  1. What are the Benefits of Credit Ratings?

    Learn how credit ratings are an important tool for borrowers. Typically, the better your credit rating, the better the loan ... Read Answer >>
Related Articles
  1. Personal Finance

    6 Ways to Build Credit Without a Credit Card

    Although it's a bit more complicated, it's definitely possible to build a credit history without traditional credit cards.
  2. Small Business

    How To Increase Your Appeal To Prospective Lenders

    Making a business eligible for loans/credit cards at the best possible rates requires crafting an excellent credit profile through the smart use of credit.
  3. Personal Finance

    The Importance Of Your Credit Rating

    A great starting point for learning what a credit score is, how it is calculated and why it is so important.
  4. Personal Finance

    Which Is More Important: Credit Report or Credit Score?

    Here's the difference between a credit report and credit score, and which is more important.
  5. Personal Finance

    How Your Credit Score Compares to the Average American's

    While only a small percentage of Americans have terrible credit scores, a whopping 30% have poor or bad credit, according to the Consumer Financial Protection Bureau.
  6. Personal Finance

    Do You Understand Your Credit Score?

    Most Americans don't really understand their credit scores. Find out what you need to know.
  7. Personal Finance

    Debunking Credit Myths and Improving Your Score

    The best way to improve your credit score is to ignore the many credit myths that exist and use these tips.
  8. Personal Finance

    Credit Score Ranges: What Do They Mean?

    Understand what credit scores in each range mean for your future. Learn how to improve your credit score and how it affects your ability to borrow money.
  9. Personal Finance

    Why You Should Improve Your Credit and How to Do It

    With credit playing a big role in many financial decisions, it is important to maintain good credit.
  10. Personal Finance

    Why The Credit Score You Buy Differs From The Lender Score

    It takes many people by surprise when they purchase credit scores and find the lender's credit score disclosure does not match.
RELATED TERMS
  1. Credit Reporting Agency

    A credit reporting agency is a business that maintains historical ...
  2. Credit Score

    A credit score is a number ranging from 300-850 that depicts ...
  3. Credit Analyst

    A credit analyst is a financial professional who possesses expertise ...
  4. Credit Limit

    Credit limit is the amount of credit that a financial institution ...
  5. Credit Mix

    The different categories of debt within a consumer's credit history ...
  6. Credit Reference

    Credit references can be a credit report or documented letter ...
Trading Center