A credit rating service is a financial services firm that collects financial information about individuals and organizations and analyzes it to provide an evaluation of the credit-worthiness of those about whom the data is collected. In the United States, a credit rating service generally will concentrate either on businesses or on individuals. Most companies that extend credit, whether for individual consumers, businesses or other organizations, rely heavily on the information and evaluation provided by credit rating services when making the decision to extend credit.
In the US, there are three credit rating services for consumer credit: Experian, Trans Union, and Equifax. Each credit rating service maintains files on nearly all Americans who have any history at all of using or applying for credit. It's rare that an American won't have a file maintained by each of these three companies, because any application for credit generally will trigger a request for a credit report from one (or more) of the companies. When such a request is received for a consumer for whom no file exists, the credit rating service will automatically start one.
In addition to collecting data, a credit rating service will analyze and evaluate the data in order to provide creditors and potential creditors with a reliable indicator of of the consumer's credit-worthiness. In the US, they each use formulas based on the Fair Isaac model of credit risk measurement to produce a credit rating, or score, which is included with the credit report. In many cases, creditors will base their decision almost exclusively on the score itself, making it crucial that the data used in producing the score be accurate.
Consumers are advised to conduct their own due diligence by monitoring the credit reports issued about them by each of the three consumer credit rating services. American law now provides that credit rating services must provide free copies of their credit reports annually to consumers requesting them. Consumers may challenge any inaccurate data found in their reports.
The credit-worthiness of companies, governments, and other organizations seeking credit is also evaluated by special financial services companies, the most widely-known of which are Standard & Poor's, Moody's, Dun and Bradstreet, and A.M. Best. Some of these commercially-oriented credit rating services concentrate on specific industries; A.M. Best, for example, issues comprehensive financial reports, including scores, on companies in the insurance business.
While the services rendered by credit rating agencies have benefited both creditors and consumers, some problems have arisen. One of the more controversial issues is the difficulty successfully disputing inaccurate information found in a consumer credit file; another is the abuse of the system committed by those intent on committing credit fraud and identity theft.
In addition, no real standard exists for reporting to credit rating agencies by creditors. Some creditors will report all of a consumer's activity, including both on-time as well as late payments, while some creditors will report only the late payments. A third group of creditors generally won't report positive or adverse information, using the threat of an adverse report to persuade a consumer to pay a bill, and then making an adverse report only when the consumer doesn't pay.