Reviewed by Aug 27, 2020| Updated on
A credit agency is a for-profit firm that collects information regarding the debts of individuals and companies and assigns a numerical value called a credit score that indicates the creditworthiness of the borrower.
Importance of Credit Agencies
Creditors and borrowers, such as banks and credit card companies, report the borrowing activity and history of their customers to credit agencies. Copies of the information published about them can be accessed by individuals and businesses by contacting the credit agency or a similar third party company and charging a nominal fee.
The information given to credit agencies includes how much credit the borrower has, how much out of the available credit they have utilised, and how their repayment behaviour looks. Credit agencies, also known as credit rating agencies, help prospective borrowers and investors decide whether to lend/extend credit to an individual/business by assessing the borrower's probability of repaying the debt in a timely manner.
Impact of Credit Agencies
Credit agencies' assessments and ratings will affect financing-driven purchases and activities, such as buying a car or securing a mortgage to acquire immovable property. Conversely, repaying college student tuition loans can impact the ratings awarded by credit agencies.
The scores and credit reports that these agencies generate may be used for other purposes other than loan approval. For example, when evaluating job candidates, employers in other countries may ask for the credit rating of potential hires. This may be due to the position's existence which might require a high sense of fiscal responsibility.
Businesses can also be measured by credit agencies, not only for their financial stability but also for the sake of potential investors in the business. As part of a due diligence procedure prior to a contract, the company's credit score would certainly be reviewed by the entity seeking to participate in a financial transaction.
For example, before securing the contract, a potential buyer who wants to acquire a company might want to understand its financial health. Likewise, potential backers for a company's public offering in a funding round or prospective buyers may require a credit agency report before advancing with their plans.