Credit Rating - Credit Rating Agencies vs Credit Bureau

What Is Credit Rating?
The term credit rating usually refers to the assessment to an entity to get the debt under control. An entity indicates a specific individual or an organization such as a corporation, a provincial authority or a sovereign government. Put simply, a higher credit rating means that if you lend money to the borrower, you have a better chance of getting it back smoothly. Similarly, companies or countries with high credit ratings are also more likely to be favored by investors for better loan terms such as lower interest rates etc.

Difference between credit rating agencies and credit bureaus
Nowadays, there are different types of organizations which will release credit rating reports for different types of borrowers. Credit rating agencies are responsible for providing credit ratings for the debt issuances for large entities such as corporations and countries. The target audience of their credit rating reports are investors. The report will help them to determine how risky an entity and its debt are before making an investment decision. In comparison, Credit bureaus will provide credit information relating to the creditworthiness of an individual instead of an organization. They usually provide credit reports and credit scores for individuals which can help lending agencies to determine the risks before offering a loan to them.

Credit Rating Agencies
Currently, the global credit rating industry is highly concentrated, and more than 90% of the rating business is provided by three agencies, Moody's, Standard & Poor's, and Fitch Ratings. Most of their credit rating will be issued in letters such as "AAA" or "CCC", which may make it easier for investors to identify the risk-reward potential for certain investments. Those agencies will categorize the financial products such as bonds from a certain entity as "Investment Grade" or "Non-Investment Grade" to indicate their risk. Apart from organizations, credit rating agencies also rate countries' debt repayment capabilities via the government debts. Those government debts are also national debts or sovereign debts which will be issued by the national governments to raise money for their development.

Credit Bureau (Credit Reporting Agencies)
Different from the reports from credit rating agencies, the reports from credit bureau are mainly focused on creditworthiness of an individual. The biggest three credit bureaus in the current market are Experian, Equifax, and TransUnion. Their business model is to collect the credit information of the individuals from different sources such as banks, financing agencies, retailers, landlords etc, and they will analyze the data and issue a report and give a credit score for a specific individual. Those credit information would be accessed by those loan agencies such as banks or credit card companies to evaluate the risks to offer the loan based on the historical credit performance for the individual who is applying for a loan or a new credit card.

Drawback Of Today's Credit Rating Industry
The main drawback of the credit rating reports is that sometimes the ratings are too positive for those high-risk financial products, which will lead to bad investments. A famous example is the financial crisis in 2008. Nearly all credit rating agencies kept giving those mortgage-backed securities the highest AAA ratings. Those biased ratings made many investors believe that those investments were safe with little to no risk. The background reason is that those agencies were trying to raise profits and their market share in exchange for these inaccurate ratings. As a result, the collapse of the mortgage market led to the global financial crisis for years. Also, since more than 90% of the global credit rating business is concentrated in the big three agencies, there are a lot of arguments about if barriers to entry to this industry are too high for small or mid-sized agencies. From the marketing point of view, we are happy to see more agencies entering the market which will enhance the quality of the credit rating products through competition.

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