Credit rating agency definition
/What is a Credit Rating Agency?
A credit rating agency is a company that reviews the creditworthiness of an entity that is in the process of or has already issued debt . The resulting credit ratings are used by investors to evaluate whether they should invest in debt securities .
If the agency issues a high credit score, then investors will likely accept a lower effective interest rate on the debt, since there is a reduced risk of default . Since debt issuers pay the credit rating agencies, there is a perceived conflict of interest in their credit scores.
Examples of Credit Rating Agencies
The best-known credit rating agencies are Moody's, Standard & Poor's, and Fitch. Each of them uses a letter-based rating system that informs investors about the financial stability of a debt issuer.
