How Do the Big Three Credit Rating Agencies Work?

Since your credit rating will be one of the main criteria that determines whether your application for a small business startup or expansion loan is approved, it is vital you know exactly what it is before applying for a loan.

Your credit rating is determined by your track record in paying debts on time and in full. Be it your credit cards, a student loan, a mortgage, a business loan, or any other money you have borrowed from a financial institution, all this information is recorded and stored by credit rating agencies, which provide the information to banks, credit card companies and other relevant financial institutions.

While there are many credit rating agencies (aka credit rating bureaus), the vast majority of the credit rating market is dominated by the “big three”; Equifax, Experian, and TransUnion. Almost every financial institution that provides credit to households and small business work with at least one of these three agencies, usually with all of them.

These agencies receive information from the financial institutions they work with on an ongoing basis. This information includes your credit card payment history, whether a bank has ever declined to honor a check you wrote, whether you have ever been in arrears in paying a mortgage or any other kind of loan, loans and credit cards you have requested, and whether they were approved or not, and at what terms.

In addition, credit rating agencies also obtain pertinent information from public records they can legally access, such as municipal and state tax liens, bankruptcy records and other relevant information from state and local courts. They can also access relevant criminal records regarding crimes such as fraud, breach of trust, check kiting and other similar convictions, and take it into account when compiling your credit report and calculating your credit score. Your credit score will be the main factor determining whether to approve a loan request, and what level of risk to attach to it. The higher the risk determination, the more expensive the loan will be.

Personal information and positive information remains on record indefinitely. Negative information, such as reports of payments in arrears, bankruptcy, checks bounced and other information that can negatively impact one’s credit report is usually kept on file for seven years.

The Importance of Credit Ratings Agencies

Every time you request for credit of any sort, the financial institution you applied to will contact the credit agencies they work with to verify your credit score. Depending on what it is, and the type and scope of credit you have requested, they may wish to review your credit report as well. This information will be crucial in the institution’s decision whether to approve your application, and at what terms.

The bottom line is that credit reporting agencies are powerful institutions, that can majorly impact your life. A problematic credit report can haunt you for years, making it much harder and more expensive for you to obtain credit. Employers, landlords and insurance companies may also request credit scores. This means that it is vital you know not just you credit score, but all the information included in your credit report.

Don’t assume the credit agencies have the correct information. Check it out for yourself, especially if you are planning to open your own business. According to a recent study, one out of every four credit reports issued by the big three credit rating agencies contains erroneous information, usually the result of mistaken identity. It can be an honest mistake, such as an agency mistakenly registering negative information about someone to another person with a similar name. Even worse, it could be the result of identity theft. Every year, thousands of Americans fall victim to identity theft. Often they can be unaware of it for years, until something happens. Suddenly find themselves being sued by people they don’t know, or discover their previous sterling credit rating has been trashed, because someone using their name has run up debts. Sometimes they can even find themselves under criminal investigation for things they aren’t connected to.

How to access your credit score and credit report

For decades, the information collected by credit reporting agencies was hidden from consumers. Individuals had no idea why they were denied credit or whether or not their reports contained mistakes. This changed in 1971, with the enacting of the Fair Credit Reporting Act. Since then, every US citizen has a clear and unambiguous legal right to access both their credit score, and more importantly their credit reports from each of the three national credit reporting agencies: Experian, TransUnion and Equifax. If you discover any wrong information in the reports, they you have a right to insist the agencies take immediate remedial action.

You are entitled to a copy of your most recent report at no charge if you’ve been turned down for credit, but you have to make the request within 60 days. In addition to the free annual report you are entitled to, you can purchase additional credit report if you need one directly from the credit rating agency.  

If you discover what you believe to be erroneous or inaccurate information in your report, you have the right to directly contact the relevant agency, and dispute that information. If, as a result of such a process, you discover you have reason to believe you have been a victim of identity theft, you can demand the agency immediately place a fraud alert or security freeze on your credit report. Since fixing a damaged credit report resulting from identity theft can be a time consuming process, it is highly recommended you remember to order your annual free credit report, so if there is a problem, you know about it sooner rather than later.

If you discover you are unable to satisfactorily resolve your dispute with the credit Rating agency, contact the Consumer Financial Protection Bureau. This is a federal institution responsible for supervising banks, lenders, and large non-bank entities, such as credit reporting agencies and debt collection companies, and ensuring they respect consumers’ rights.

Given the importance of your credit score in determining whether you will be able to get the business startup financing you need, and what it will cost you, it is highly recommended you obtain your most up to date credit reports and scores carefully from all three major agencies. If there are problems, try and resolve them before applying for a loan. If this is not possible, do not try to hide the information from the loans officer, since they can easily obtain the information, and by not disclosing it you look bad. Explain that you are currently disputing it, as you believe you have been the victim of identity theft. The fact that came fully prepared, with all the relevant information makes you look professional and competent, which is exactly what you need.


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