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.

RELATED FAQS

  1. Why do some institutions (like American Express) allow you to go above your revolving ...

    Learn why institutions such as American Express and Visa allow exceeding revolving credit limits, and consider when this ...
  2. In what types of financial situations would credit spread risk be applied instead ...

    Find out when credit risk is realized as spread risk and when it is realized as default risk, and learn why market participants ...
  3. What factors are taken into account to quantify credit risk?

    Learn how probability of default, or PD; loss given default, or LGD; and exposure at default, or EAD, are used to help quantify ...
  4. Why do high profiting sales mitigate credit risk?

    Learn more about credit risk in loaning to individuals and businesses. Understand how credit risk is determined and the impact ...
RELATED TERMS
  1. FAKO Score

    A derogatory term for a credit score that is not one of the FICO ...
  2. Balance-To-Limit Ratio

    The amount of money you owe on your credit cards compared to ...
  3. FICO (Fair Isaac)

    A major analytics software company that provides products and ...
  4. Prime Borrower

    A prime borrower is considered likely to make loan payments on ...
  5. Prime Credit

    A credit score that falls into the range that is one step down ...
  6. Super-Prime Credit

    Consumers with super-prime credit are considered to have excellent ...

You May Also Like

Related Articles
  1. Stock Analysis

    How Visa Counts On Your Free-Spending ...

  2. Stock Analysis

    What Do AA+ And AAA Credit Ratings Mean?

Trading Center