Credit Agency

What Is a Credit Agency?

A credit agency is a for-profit company that collects information about individuals' and businesses' debts and assigns a numerical value called a credit score that indicates the borrower's creditworthiness.

Understanding Credit Agencies

Creditors and lenders, such as credit card companies and banks, report their customers' borrowing activity and history to credit agencies. Individuals and businesses can obtain copies of the information reported about them by contacting the credit agency or a related third-party company and paying a nominal fee.

However, in 1970 the Federal Trade Commission passed the Fair Credit Reporting Act (FCRA), which requires the major credit agencies to provide a free copy of your credit report once every 12 months upon request.

The information provided to credit agencies includes how much credit is available to that borrower, how much of the available credit they have used, and what their repayment activity looks like. Credit agencies, also known as credit rating agencies, help potential lenders and creditors determine whether to lend or extend credit to an individual or business, by predicting the likelihood that the borrower will repay the debt in a timely manner.

Ways Credit Agencies Affect Financial Transactions

The assessments and ratings provided by credit agencies can affect financing-driven purchases and activities such as buying a car or securing a mortgage to acquire real estate. Conversely, the repayment of tuition loans for college students may affect the ratings assigned by credit agencies.

Three consumer credit agencies are TransUnion, Equifax, and Experian. There can be variances in the ratings assigned by the agencies for the same individual. These differences may stem from different businesses and lenders reporting financial information about borrowing and repayment activity to some agencies, but not to all three.

The scores and credit reports that are generated by these agencies may be used for other purposes outside of loan approval. For instance, certain employers might request the credit rating of potential hires when considering job candidates. This may be due to the nature of the position, which could require a high sense of fiscal responsibility.

Businesses can likewise be assessed by credit agencies, not only for their financial fitness to repay financing they apply for, but also for the sake of potential investors in the business. As part of a due diligence process before a deal, the credit score of the business will likely be examined by the party that wishes to engage in a financial transaction. For example, a potential buyer who wants to acquire a business may want to understand its financial health before it secures the deal.

Likewise, potential backers in a funding round or prospective buyers for a public offering from the company may require a report from a credit agency before advancing their plans.