Credit Rating

Definition of 'Credit Rating'


An assessment of the credit worthiness of a borrower in general terms or with respect to a particular debt or financial obligation. A credit rating can be assigned to any entity that seeks to borrow money – an individual, corporation, state or provincial authority, or sovereign government. Credit assessment and evaluation for companies and governments is generally done by a credit rating agency such as Standard & Poor’s or Moody’s. These rating agencies are paid by the entity that is seeking a credit rating for itself or for one of its debt issues. For individuals, credit ratings are derived from the credit history maintained by credit-reporting agencies such as Equifax, Experian and TransUnion.
 

Investopedia explains 'Credit Rating'


Credit ratings for borrowers are based on substantial due diligence conducted by the rating agencies. While a borrower will strive to have the highest possible credit rating since it has a major impact on interest rates charged by lenders, the rating agencies must take a balanced and objective view of the borrower’s financial situation and capacity to service/repay the debt.
 
The credit rating has an inverse relationship with the possibility of debt default. In the opinion of the rating agency, a high credit rating indicates that the borrower has a low probability of defaulting on the debt; conversely, a low credit rating suggests a high probability of default.
 
Credit rating agencies typically assign letter grades to indicate ratings. Standard & Poor’s, for instance, has a credit rating scale ranging from AAA (excellent) and AA+ all the way to C and D. A debt instrument with a rating below BBB- is considered to be speculative grade or a junk bond.
 
Credit rating changes can have a significant impact on financial markets. A prime example of this effect is the adverse market reaction to the credit rating downgrade of the U.S. federal government by Standard & Poor’s on August 5, 2011. Global equity markets plunged for weeks following the downgrade.
 
For individuals, the credit rating is conveyed by means of a numerical credit score that is maintained by Equifax, Experian and other credit-reporting agencies. A high credit score indicates a stronger credit profile and will generally result in lower interest rates charged by lenders.
 



comments powered by Disqus
Hot Definitions
  1. Passive ETF

    One of two types of exchange-traded funds (ETFs) available for investors. Passive ETFs are index funds that track a specific benchmark, such as a SPDR. Unlike actively managed ETFs, passive ETFs are not managed by a fund manager on a daily basis.
  2. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another market so that it balances out. So when examining a specific market, if all other markets are in equilibrium, Walras' Law asserts that the examined market is also in equilibrium.
  3. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will respond similarly to a marketing action. Market segmentation enables companies to target different categories of consumers who perceive the full value of certain products and services differently from one another.
  4. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following:
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option is purchased and the lower premium option is sold - both at the same time. The higher the debit spread, the greater the initial cash outflow the investor will incur on the transaction.
  6. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious debt when government leaders use borrowed funds in ways that don't benefit or even oppress citizens. Some legal scholars argue that successor governments should not be held accountable for odious debt incurred by earlier regimes, but there is no consensus on how odious debt should actually be treated.
Trading Center