What do Credit Rating Agencies do

Credit rating agencies are corporations which collect information on consumer credit accounts (like mortgages, credit cards, and car loans), and use this information to assess the degree to which a person reliably pays back their loans. They share this information with customers like banks, potential landlords, and increasingly employers, who want to know whether an applicant is a good credit risk. In the United States, there are three major credit rating agencies: Equifax (EFX), Transunion (owned by the Marmon Group), and Experian (EXPN). Credit ratings also exist for corporations and governments, although they are maintained by separate, specialized companies usually referred to as bond rating services. The most important bond ratings companies are Standard & Poor’s (owned by McGraw-Hill) and Moody’s (MCO).

Credit rating agencies work by gathering information about individual lenders from as many sources of credit as possible, and maintaining special files, or reports, on each individual. Data gathered includes the issuer and the amount of all credit agreements, including credit cards, mortgages, car loans, lines of credit, and other debts. In addition, the agency records whether any payments have been late, typically dividing these into late payments over 30 days overdue, over 60 days overdue, and over 90 days overdue. In addition, an entry is also filed on each person’s credit report when someone checks the report as part of an application for new credit.

Once the information has been collected, the agency then uses a proprietary formula to produce a special rating, or credit score. Many different methods of calculating ratings exist, although the most well-known is the Fair Isaac system, commonly referred to as the FICO score. This score represents the extent to which the person has a history of good or poor credit. The highest potential score on the FICO scale is 850; those in the 700 range have good credit. The lowest possible score is 300.

Once the data has been gathered and processed, it is made available to the credit rating agency’s clients. Note that in this business relationship, the clients are other companies which extend credit or make credit-related decisions (like landlords and employers), not the individuals themselves. Credit reports are routinely used in many countries for these companies to check up on an applicant’s history and decide whether or not extending them further credit is an unacceptably high risk. A person with a very good credit report is likely to be rewarded with lower interest rates. People with very poor credit scores are likely to be denied a loan entirely, or else offered one at very high interest rates.

In addition, individuals can access their own credit reports – and are encouraged to do so on an annual basis, so that they can detect cases of identity theft or errors, both of which can rapidly ruin an otherwise faultless credit rating. If an error or other problem is identified on the credit report, people must work with the credit agency and with the alleged creditors involved in order to correct the error. In the United States and Canada, credit rating agencies by law must supply a credit report to each individual free of charge upon request. In the United States, each citizen may order their credit report once per year, free of charge, via AnnualCreditReport.com. In Canada, citizens must order and receive their free credit report via the mail; online credit reports are available instantly but must be paid for by a fee.

In the U.S., as stated, the three credit major consumer credit rating agencies are Equifax, Transunion, and Experian. Only Equifax and Transunion are now active in Canada. Experian (itself based in Ireland and England), Equifax and Transunion are also all active in the United Kingdom.