Credit Reporting Agencies

Written by Kimberly Clark
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A credit reporting agency is a third-party company that provides an unbiased risk analysis of a borrower's ability to repay a loan. Once the potential borrower's creditworthiness is determined, the credit reporting agency distributes this information to unaffiliated companies that are in the business of lending money or extending credit. The entities most commonly evaluated because of their requests for credit include individual consumers, corporate customers, and government agencies.

Individual Consumers

Credit reporting agencies have been in the business of collecting and maintaining financial information that would enable creditors to make sound business decisions regarding the extension of credit to individuals, for well over a century. Initially established to provide a systematic way for lessening the time and the number of supporting documents it traditional required for a lender to make a definitive determination, the credit reporting industry has grown into a multi-billion dollar industry. When deciding whether or not to extend credit to a person, the majority of lenders turn to one of the following three consumer credit reporting agencies:

1. Experian (formerly TRW),
2. TransUnion, or
3. Equifax

Agencies like these keep up-to-date detailed records that summarize an individual's use of credit and compiles the information into what is known as a credit report. The information contained in the credit histories maintained by the credit reporting agency include such things as what accounts the person currently has open or had opened in the past, the amount of credit the person was allotted, how they used that credit, and how timely they made their payments. All of this information is then mathematically factored into an equation that calculates a person's credit score, which essentially is a rating of the person's financial capabilities.

In addition to tracking the individual's financial transactions, the credit reporting agencies also collect identifying information about the consumer. The information contained in this section of the credit report includes general things like past and present names, addresses, telephone numbers, and places of employment as well as specific identifiers such as Social Security number and date of birth. Details about civil judgments, tax liens, and bankruptcies are other items that might be listed in a consumer's credit report.

Corporate Customers

Corporations and small businesses often seek outside funding from capital lending sources to finance the growth of their companies. After receiving a request for a business loan, the lenders try to determine the likelihood of getting the loan repaid. Thus, before extending any credit the lenders typically consult with one of the credit reporting agencies that provides information on the commercial business sector.

The information contained in a corporate credit report is very similar to what is contained in a consumer report. The report details the credit that has been extended to the companies and how well they pay on their debts. However most secular credit reporting agencies have a rather different method for rating the performance of a business that differs significantly from the way consumer credit scores are calculated.

Some credit reporting agencies collect information for companies located only in the United States, whereas others track data internationally. Furthermore, some secular credit reporting agencies only rate a certain type of business or one particular industry. For instance the following agencies only report on the credit activities that occur in the transportation industry:

1. Compunet Credit Services
2. Transcredit
3. Transportation Credit Exchange
4. Truckload Credit

Government Agencies

In an effort to raise money, many government agencies and companies too, sell bonds to the public. In exchange for the initial investment, the issuer of the bonds provides regular interest payments to the investor. When the bond reaches maturity, the issuer is then required to pay a fixed lump sum to cover the principal.

To assist investors in making prudent business decisions, credit reporting agencies such as Standard & Poor's, Moody's, and Fitch IBCA rate governments' or companies' ability to make scheduled interest and principal payments. Typically the highest rating is "AAA" and it generally means there is a good chance that all payments will be made. The higher a bond's rating the less risky the investment is considered and thus it yields lower interests rates.

Conversely, the lower the bond's rating the higher the interest rates the issuer is required to pay. Of course with higher yields comes greater risk. Bonds with really low ratings are typically labeled junk bonds.

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