What is a Credit Reporting Agency?

Credit reporting/rating agencies are independent bodies that analyze the credit quality of public and private issuers. With so many debt issuers, these agencies were created with the aim of issuing ratings on the risk of securities remaining unpaid. These companies consider fixed income.

How Does a Credit Reporting Agency Work?

These agencies analyze credit quality by looking at the credit risk of debts issued and offer a rating that shows investors the risks of default of different entities without making a detailed analysis. In normal marketplaces, the state always has the lowest credit risk as it has the highest credit quality. Entities with high credit quality pay lower returns than entities with low credit quality. Top rating agencies include Fitch IBCA, Moody's and Standard & Poor's. These firms do not hold any risk or interest positions in markets and they are not members of any group acting in them. These agencies analyze the economic standing of a company, financial statements, risks involved in company business and quality of managers. A company that offers fixed-income security and asks to get a rating from a credit rating agency has to pay to get rated. This might be controversial as companys managers may think they pay for a better rating. However, this does not happen as it would mean the end of business for these credit reporting agencies. The main role of credit reporting agencies is to guide investors on the risk of investing in certain financial assets. Companies with no qualification and needs to issue debts in the financial markets have the disadvantage of paying high interests.

Ratings of Credit Reporting Agencies

There are short term and long term ratings used in the money markets and capital markets respectively. Ratings are not static; they change as the market circumstances change.