Defining A Credit Rating Agency And What To know About Them

Let me start by giving you the definition of a credit rating agency: a credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations. In some cases, these issuers are companies, cities, non-profit organizations, or national governments issuing debt-like securities that can be traded on a secondary market.

A credit rating measures credit worthiness, the ability to pay back a loan, and affects the interest rate applied to loans. (A company that issues credit scores for individual credit-worthiness is generally called a credit bureau or consumer credit reporting agency.)
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 exist more than 100 rating agencies worldwide.

It is important to note that Credit rating agencies vary significantly in their sizes, focus, and strategies. Most of them focus on particular regions or industries. Some others provide services to firms including privately-held companies. They do not rate the credit risks of specific fixed-income securities. Some agencies offer subsidiary business services like risk management and consulting services.
Credit ratings are used by investors, issuers, investment banks, broker-dealers, and by governments. For investors, credit rating agencies increase the range of investment alternatives and provide independent, easy-to-use measurements of relative credit risk; this generally increases the efficiency of the market, lowering costs for both borrowers and lenders.

This in turn increases the total supply of risk capital in the economy, leading to stronger growth. It also opens the capital markets to categories of borrower who might otherwise be shut out altogether: small governments, startup companies, hospitals and universities.

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