A credit agency is a company that establishes credit ratings for issuers of various types of debt. In this sense, issuers can refer to local or state governments, non-profit organizations, national governments, and some private entities. Credit ratings are based upon an issuer's credit worthiness, which, in turn, will impact an issuer's overall interest rate.
Companies and organizations that have a proven record of paying back loans will gain a positive credit rating. However, those companies that do not have an ideal financial track record will often suffer a poor rating as a result. In both cases, the rating that is given to a company by a credit agency is crucial.
Some of the larger credit agencies include Fitch Ratings, Standard & Poor's, and Moody's. Credit agencies can be found in nearly every country, and most agencies largely impact the overall worth of a company. Credit agencies closely monitor the credit rating of large businesses, and credit ratings can greatly fluctuate throughout the lifespan of a company.
Investors, banks, brokers, and governments all rely upon credit agency ratings. By investigating credit ratings, investors can determine the overall credit risk of a company. In addition, issuers look to their own credit ratings in order to determine the worth of their company. Credit ratings allow issuers to analyze the effectiveness of their company, and to scrutinize company tools and values. A credit agency also has the ability to play a large part in structured financial transactions.
Credit ratings determine the interest rates involved in a structured financial transaction. It is not uncommon for a company to consult with a credit agency in order to reach a sought-after credit rating. While credit ratings prove to be useful in a number of ways, credit agencies are also the topic of much debate.
Credit agency criticism includes the fact that most credit agencies do not react quickly enough when it comes to downgrading a company. Other criticisms include the notion that some credit agencies have close relationships with various businesses, and that a poor credit rating has the ability to create a massive impact upon the economy as a whole.
It is also possible for credit agencies to make mistakes regarding a company's earned rating. This is especially common when it comes to a company's structured products. When this type of agency error occurs, numerous banks that rely upon accurate credit ratings are adversely affected.
