What is the importance of credit rating agencies?

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Credit rating agencies are tasked with providing to investors and others information regarding the creditworthiness of an individual. In other words, these agencies analyze whether a person or business entity will be able to reliably pay back money lent to them; an investor wants a return on their investment, and a creditor (someone who loans money, like a mortgage lender) will want to be paid back. An agency's reports allow creditors and investors to make a more informed decision about the risk of lending someone money or investing in an entity based on their credit history.

Most credit rating agencies use their own methods to evaluate someone's creditworthiness, but there are only a few popular agencies, so the rating process has been mostly standardized. Credit rating agencies bear the important responsibility of helping to regulate the financial market by providing risk measures to help people and companies understand the credit risks of an investment.

Credit rating agencies are also important to the functions of everyday life. They provide credit scores to individuals to help them gain access to credit cards, lease agreements (most landlords check a prospective tenant's credit score), mortgages, and other loans. A good credit rating will allow a person to borrow money more easily, while a poor credit rating will do the opposite. Most lenders will usually base their decision on whether to extend someone a line of credit or lend them money on that person's credit score.

Last Updated by eNotes Editorial on

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