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 as credit bureaus are sometimes called "credit reporting agencies." Credit rating agencies, such as Standard and Poor's, are responsible for rating corporations and their debt issuances. It allows investors to determine how risky a corporation and its debt are before making an investment purchase. In effect, what is the likelihood the corporation will default on its debt obligation?

Credit bureaus, such as Equifax, are agencies that provide information relating to the creditworthiness of an individual. They provide credit reports and credit scores, which helps creditors, such as banks, determine how risky an individual is to make a loan out to. The higher the credit score, the better a person's credit profile is.

Key Takeaways

  • A credit rating agency provides information on corporations and countries and the debt that they issue, assigning them a credit score to determine the quality of the debt and how risky it is.
  • The three main credit rating agencies are Standard & Poor's, Moody's, and Fitch Ratings.
  • Investors that seek to make capital investments with the hope of generating a return would utilize a credit rating agency.
  • A credit bureau is responsible for providing credit reports and credit scores that detail and rate the creditworthiness of an individual and how risky it would be for a creditor to extend credit to.
  • The three main credit bureaus are Equifax, TransUnion, and Experian.
  • Banks, landlords, and credit card companies are some of the entities that would utilize credit bureaus.

Credit Rating Agency

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

Credit rating agencies allow investors to compare the risk-reward potential of certain investments and provide insight into the financial stability of debt-issuing companies. Credit ratings are also assigned to 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. These ratings are typically classified as investment grade or non-investment grade.

Credit ratings are based on a number of variables and involve market-based, historically estimated, company-level information. Assessments range from business attributes to underlying investments and are all designed to measure the likelihood the borrower will repay its debt.

The credit rating agencies regularly evaluate corporations and their debt and adjust their ratings based on their reviews. This most always often happens if the corporation has made a big announcement, such as a merger. Rating agencies also rate countries, known as sovereign debt.

Credit Bureau

Credit reports and credit scores are compiled primarily for lenders about individual borrowers. The agencies that gather and distribute information about consumer creditworthiness are called credit bureaus or credit reporting agencies.

The industry is dominated by the top three credit bureaus: 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. 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 ability to rent a home or secure employment.

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 2007-08 financial crisis

Key Differences

Though both credit rating agencies and credit bureaus provide financial information to individuals, the type of information, and the entities the information describes, as well as those who use the information, are vastly different. The reason to access the information is particularly different between the two.

If an investor was looking to invest $1,000 in the hopes of generating a return, they may consider purchasing the corporate bonds of a company. Before they make this investment, they would access the credit information provided by S&P, Moody's, or Fitch on the company to determine how risky the investment is and the likelihood they will lose their investment. The reason to access this information is for personal gain.

An individual, on the other hand, would have no reason to access their credit report unless they wanted to know their credit score. Credit information would be accessed by a bank or credit card company only if an individual applied for a loan or a credit card.

The bank, then, for example, would use the information provided by the credit bureaus to see the credit profile of the loan applicant. This would allow the bank to see if the applicant has good or poor credit and make a decision on whether or not to offer a loan and at what interest rate. The reason to access this information is to manage risk and prevent a possible loss.

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  1. Moody's Investors Service. "Moody's Rating Scale," Page 1.

  2. Standard and Poor's Ratings Service. "Standard & Poor's Ratings Definitions," Pages 5-6.

  3. Fitch Ratings. "Rating Definitions."

  4. Experian. "What Are the Different Credit Scoring Ranges?"

  5. Federal Trade Commission. "Free Credit Reports."