Guide to the Credit Bureaus

Credit bureaus are companies that collect information about the lending history of individuals and small business. These credit bureaus process this information and issue a number rating for each consumer that has taken out some form of credit. This number, known as a credit score, is a calculation by the bureaus of the likelihood that a person will pay back a loan. The higher the score a person receives, the more faith a bureau has that the person will pay back the loan.

Purpose

The main purpose of credit bureaus is to offer an impartial rating of an individual's creditworthiness to lenders and other people considering offering the individual some form of credit. Lenders can use this rating to determine how risky a bet an individual is in regards to borrowing money, and can set interest rates according; generally, to secure credit, people with lower credit scores have to pay higher interest rates on the principal of a loan.

Business Model

Credit bureaus make money by charging lenders and other businesses to access these credit scores. Companies will either pay annual subscription rates to view credit scores or purchase these reports individually. Some bureaus also charge consumers for services related to these reports. Credit scores are not public information, although an individual has the right to check his own score once a year, free of charge. By law, companies must have a legitimate business interest in checking a person's credit scores.

The Big Three

The three largest credit bureaus---known colloquially as The Big Three---are TransUnion, Equifax, and Experian. All perform essential the same task, but do so in different ways. An individual usually has three different credit scores---one for each company---as each company uses it own methods of gathering lending information and scoring it. However, while each company may score a single individually different, these scores are often closely related.

Credit Rating Agencies

Whereas credit bureaus provide measurements of the creditworthiness of individuals and some small businesses, credit rating agencies measure the creditworthiness of large companies, particularly those that issue bonds. The factors used to determine the credit rating of these companies, such as income and credit history, is much the same. However, instead of issuing ratings in the form of a number, credit rating agencies issue scores in the form of letter grades.