The Advantages of Credit Rating Agencies

The major credit-rating agencies serve a vital function for American businesses and consumers. They assess risk in order to curb potential losses that can result from reckless lending practices. The major U.S. rating agencies for business are Moody's Investors Service, Standard & Poor's, Dun & Bradstreet, Fitch Ratings and A.M. Best. Banks rely upon TransUnion, Experian and Equifax in the consumer sector.

Assessing Risk

Banks must have an independent way to determine the creditworthiness of consumers before extending loans and issuing credit cards. The major consumer rating agencies fulfill this role. As for businesses, the same concept applies but with typically larger amounts at stake. Also, as corporations frequently issue bonds to a wide range of investors, the business rating agencies help to safeguard those investments.

Minimizing Loan and Bond Losses

The business and consumer credit rating agencies help to mitigate potentially disastrous losses that could shake the financial system. Banks are able to accurately measure possible losses through the credit scores of consumers. The agencies responsible for measuring them use sophisticated models to predict the likelihood of default. The business rating agencies help to measure the prospect of losses from loans and bonds using similar principles.

Providing Accountability

Our culture of consumption requires money to remain sated, and if those funds are not forthcoming by the traditional work ethic and weekly paycheck, credit has become widely available to pick up the slacks, shirts, televisions, computers, cars, et al. Excess credit can lead to problems with payback, and without the guiding hand of accountability provided by the major credit rating agencies, escalating problems could result.