Demerits Of Credit Rating

The disadvantages, limitations or demerits of credit rating are listed below.

Possibility of Bias Exist : The information collected yesteryear the rating means may last discipline to personal bias of the rating team. However, rating agencies essay their best to furnish an unbiased visit of the credit lineament of the companionship and/or instrument. If not, they volition non last trusted.
Improper Disclosure May Happen : The companionship beingness rated may non give away surely fabric facts to the investigating squad of the rating agency. This tin move demeanour on the lineament of credit rating.
Impact of Changing Environment : Rating is done based on introduce in addition to yesteryear information of the company. So, it volition last hard to predict the time to come fiscal set of the company. Many changes accept house due to changes inward economic, political, social, technological, legal in addition to other environments. All this volition demeanour on the working of the companionship beingness rated. Therefore, rating is non a guarantee for fiscal soundness of the company.
Problems for New Companies : There may last problems for novel companies to collect funds from the market. This is because, a novel companionship may non last inward a set to essay its fiscal soundness. Therefore, it may have lower credit ratings. This volition arrive hard to collect funds from the market.
Downgrading yesteryear Rating Agency : The credit-rating agencies periodically review the ratings given to a item instrument. If the functioning of a companionship is non equally expected, in addition to hence the rating means volition downgrade the instrument. This volition demeanour on the icon of the company.
Difference inward Rating : There are cases, where dissimilar ratings are provided yesteryear diverse rating agencies for the same instrument. These differences may last due to many reasons. This volition practice confusion inward the minds of the investor.