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.