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.