Credit rating is important because it shows how worthy a person or a company is in terms of financial assessment.
It is called credit worthiness or the ability to pay back what was loaned. How it was assessed depends on the history when it comes to loans and the ability to pay combined with the person or the company’s assets and liabilities. An institution that is able to determine a company’s credit worthiness is called a credit rating agency.
Companies who seek out a credit rating agency can range from non-profit organizations to private companies. They are sought out because the credit rating affects the interest rate applied to loans. A company that received a low rating will have a high interest rate compared to the one that has received a high rating because it will have a lower interest rate. Thus, companies strive to get a high credit rating. Aside from that, investors are more interested in companies that have a high rating because it means that these companies have low credit risk. Do you know that credit ratings are not only used by investors but also by issuers, investment banks, brokers, dealers and the government? Even if it is just one factor that they use to decide on whether or not they should invest or not, it gives a huge weight on the investment decision.