Credit Agency: What It Is and How It Works

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. Learn how lenders use financial information from credit agencies to make decisions about you.

How Credit Agencies Work

Creditors and lenders, such as credit card companies and banks, report their customers' borrowing activity and history to credit agencies, or credit reporting agencies.

You can get copies of the information reported about you by contacting the credit agency. You are entitled to one free copy of your credit report each year from each of the three major credit agencies, including Experian, Equifax, and TransUnion. You can also request your free annual credit report through AnnualCreditReport.com.

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 main consumer credit agencies are TransUnion, Equifax, and Experian, but there are many others. 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 of the major agencies.

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.

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.

The Bottom Line

Credit agencies collect, analyze, and report information that can have significant affect on your financial healthy. The financial information they provide to lenders can affect whether you get approved for loans and for what terms. Understanding how credit agencies work can help you make better decisions about your finances so that you can improve or maintain your credit.