Credit rating agency

From Academic Kids

A credit rating agency is a company that rates the ability of a person or company to pay back a loan. The rating given by a credit rating agency is important because it affects the perceived risk element incorporated into interest rates that are applied to loans.

Interest rates are not the same for everyone, but instead are based on risk based pricing, a form of price discrimination based on the different expected costs of different borrowers, as set out in their credit rating. There are 136 credit rating companies in the world, so help list them.

The lowering of a credit score or grade by a corporate credit rating agency can create a vicious cycle, as not only interest rates for that company would go up, but many contracts it might have with financial institutions may have credit rating related clauses which may cause things to be repriced to less favorable terms, causing a large increase in expenses to that company, possibly causing it to become even less creditworthy.


Criticisms of Credit Rating Agencies

Besides the criticisms that have been applied to the overall system of credit, and of risk based pricing, there are many criticisms which have been lobbed against credit rating agencies.

The first criticism is that Credit agencies ratings (that is, the opinions offered by them not including the objective facts contained within their reporting, the best example would be the FICO score), are biased in some way towards the profit of banks and at the expense of the customer. This may or not be intentional. For example, an individual is usually not given a high credit rating initially, but usually must "prove himself" by using credit, many times unecessarily (incurring expense), in order to build up a credit history.

Large corporate rating agencies like Standard & Poor are critized for having too familiar a relationship with company management, possibly opening themselves to undue influence or the vunerabilty of being misled. These agencies meet frequently in person with the management of many companies, and advise on actions the company should take to maintain a certain rating.


See also

External links

Template:Poli-stub Template:Corp-stub Template:Econ-stubde:Ratingagentur


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