What are the benefits of credit ratings?

By Joseph Nguyen AAA
A:

Credit ratings are an important tool for borrowers to gain access to loans and debt. Good credit ratings allow borrowers to easily borrow money from financial institutions or public debt markets. At the consumer level, banks will usually base the terms of a loan as a function of your credit rating, so the better your credit rating, the better the terms of the loan typically are. If your credit rating is poor, the bank may even reject you for a loan.

At the corporate level, it is usually in the best interest of a company to look for a credit rating agency to rate their debt. Investors often times base part of their decision to buy bonds, or even the stock, on the credit rating of the company's debt. Major credit agencies, such as Moody's or Standard and Poor's, perform this rating service for a fee. Usually, investors will look at the credit rating given by these international credit rating agencies as well as ratings given by domestic rating agencies before deciding to invest. (Learn more about rating agencies in A Brief History Of Credit Rating Agencies.)

Credit ratings are also important at the country level. Many countries rely on foreign investors to purchase their debt, and these investors rely heavily on the credit ratings given by the credit rating agencies. The benefits for a country of a good credit rating include being able to access funds from outside their country, and the possession of a good rating can attract other forms of investment to a country, such as foreign direct investment. For instance, a company looking to open a factory in a particular country may first look at the country's credit rating to assess its stability before deciding to invest.

This question was answered by Joseph Nguyen.

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