A better way to rate charities...before you give
This brings up a good point; you wouldn't purchase anything else based solely on ratings that didn't account for how well the product works. So why would you give to a charity based solely on a set of financial data without observing how well the charity lives out its mission.
If a charity incurs high overhead costs or has low cash reserves but still manages to provide foods and shelter for a large populace of people, shouldn't that count for something? The Wall Street Journal took a look at how charity rating sites plan to adjust their methods to include this important aspect of a charity's success in the coming year.
Unfortunately, adherence and fulfillment of a charity's mission is a bit too intangible for a five star rating system based off of tax statements. This is why several big name charity rating sites are working hard to provide new methods of rating charities. Charity Navigator, my go-to guide for nonprofit information, is planning to let charities self report their progress toward long term goals and mission fulfillment. Additionally, Guidestar will be letting users rate charities the same way they already rate many other products.
Allowing users to rate charities is a good way to add to the overall value of the ratings system by incorporating multiple viewpoints. But it isn't without its faults. We have already seen users trash the ratings for a video game called Spore and the tax return software TurboTax in a coordinated manner due to a disagreement with a company decision. This is relatively rare in the retail world, but I could see it becoming a common occurrence as groups attack the ratings of a charity whose mission they disagree with. Thankfully, Guidestar will be letting charities respond to user reviews, providing a system of checks and balances to the process.
Overall these sites provide a good starting guide and likely enough information to make smaller donations. If you are really concerned about how your money is used and you're donating anything more than a couple hundred bucks, someone at the organization should be able to spare a few minutes to chat with you about how your money is actually used -- and provide a follow up on the use of your donation when you go to donate the next time.