Credit 🅷Rating Age🌞ncy vs. Credit Bureau: An Overview

It is easy to confuse credit bureaus and 澳洲幸运5官方开奖结果体彩网:credit rating agencies, especially since credit bureaus are sometimes called "澳洲幸运5官方开奖结果体彩网: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. Understanding the difference can help𝔍 you save money when you're applying for a loan or credit card.

Credit Rating Agency

Credit rating agencies attempt to 澳洲幸运5官方开奖结果体彩网:assess๊ 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. You may want to look up a company's credit rating when you're🐻 evaluating investments or buying a product such as life insurance from a company.

The three major international credit rating agencies are 澳洲幸运5官方开奖结果体彩网:Fitch Ratings, 澳洲幸运5官方开奖结果体彩网:Moody's Corporation, and 澳洲幸运5官方开奖结果体彩网:S&P Global. Another major rating agency, 澳洲幸运5官方开奖结果体彩网: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 "A" associated ratings 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 de🔥bt.

Credit Bureau

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 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网: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 bureaus, 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 will likely find it easier to get credit and at better interest rates than 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 payment history (basically how reliably you pay your bills), which accounts for 35% of your score, and amounts owed (particularly your 澳洲幸运5官方开奖结果体彩网:credit utilization ratio, or how much outstanding debt you have as a percentage of all the credit currently available to you), which accounts for 30% of your score.

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, 澳洲幸运5官方开奖结果体彩网:VantageScore, has its own sಌimilar scoring mode✨ls but with slightly different weightings.

Credit Rating Agency vs. Credit Bureau Example

Credit Rating Agency

Company AღBC needs to raise money to help pay for a new factory. To do this, it decides it will issue bonds that will be purchased by investors. Investors, however, do not purchase bonds without information on the bond and the company issuing it. They look to the analysis of ra𓄧ting agencies to determine how risky a bond and company are.

To ensure investors will purchase its bonds, Company ABC hires🐓 S&P to rate its bond offering as well as the company itself. S&P conducts a complete financial analysis of Company ABC as well as its bond offering, providing its analysis in reports that investors can use to decide if the bonds are a good investment for them.

This clearly impacts your finances if you are an investor. You'll want to pay attention to information from all the major credit rating agencies before buying the bonds.

Credit Bureau

Amy wants to purchase a house and needs a $300,000 mortgage to do so. She applies for a mortgage with Bank XYZ. To determine how risky it is to lend money to Amy, Bank XYZ looks at Amy's credit profiles that are with the three credit bureaus.

The information the credit bureaus have on Amy will list her entire credit history, the current amount of debt she has, the types of debt, her history of payments, and more. Bank XYZ will use this information to determine if Amy has a strong credit profile, is a low-risk borrower, and will be able to pay back a $300,000 loan without defaults or other issues.

If you're Amy, you should have started looking at your credit reports as much as a year in advance, so that if there is 澳洲幸运5官方开奖结果体彩网:negative information in them, you can clear up any mistakes a🌠nd rebuild your credit if needed before you apply for the loan.

Frequently Asked Questions (FAQs)

The Bottom Line

Credit rating agencies and credit bureaus are both in the business of evaluating the creditworthiness of ent♚ities 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.