Credit Rating

AAA

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.
 

RELATED TERMS
  1. VantageScore

    A consumer credit rating product developed by three credit rating ...
  2. Demand Letter

    A letter sent to a debtor requesting payment. A demand letter ...
  3. Credit Reference

    A credit reference can be a report from a credit agency for either ...
  4. Default Risk

    The event in which companies or individuals will be unable to ...
  5. Credit Risk

    The risk of loss of principal or loss of a financial reward stemming ...
  6. Credit Enhancement

    A method whereby a company attempts to improve its debt or credit ...
RELATED FAQS
  1. How did the ABX index behave during the 2008 subprime mortgage crisis?

    Read about the disastrous performance of the various ABX indexes in the subprime mortgage crisis of 2008 during the middle ...
  2. What's the difference between a credit rating and a credit score?

    Learn about the differences between credit ratings and credit scores, and review how these expressions of creditworthiness ...
  3. How can I avoid paying unnecessary credit card fees?

    Examine different strategies for reducing fees on credit cards. Learn about the Consumer Financial Protection Bureau and ...
  4. What do the letters / symbols on credit ratings mean?

    Learn about the numbers, letters and symbols used to express credit ratings and credit scores. Understand what these symbols ...
  5. Does a good credit rating guarantee repayment?

    Learn how credit ratings help investors determine the creditworthiness of an issuer and the risk associated with making an ...
  6. What's the difference between EBITDA, EBITDAR and EBITDARM?

    EBITDA, EBITDAR and EBITDARM are analytic indicators commonly used by management to evaluate the financial performance and ...
  7. Why do commercial bills have higher yields than T-bills?

    The reason that commercial bills have higher yields than T-bills is due to the varying credit quality of each bill type. ...
  8. How is my credit score calculated?

    The credit score, commonly referred to as a FICO score, is a proprietary tool created by the Fair Isaac Corporation. This ...
  9. What does investment grade mean?

    Credit ratings provide a useful measure for comparing fixed-income securities, such as bonds, bills and notes. Most companies ...
Related Articles
  1. Investing Basics

    What Is A Corporate Credit Rating?

    Is the bond you're buying investment grade, or just junk? Find out how to check the score.
  2. Bonds & Fixed Income

    Corporate Bonds: An Introduction To Credit Risk

    Corporate bonds offer higher yields, but it's important to evaluate the extra risk involved before you buy.
  3. Credit & Loans

    The Importance Of Your Credit Rating

    A great starting point for learning what a credit score is, how it is calculated and why it is so important.
  4. Personal Finance

    The Debt Ratings Debate

    Lack of competition and potential conflicts of interest have called the value of these ratings into question.
  5. Bonds & Fixed Income

    Why Bad Bonds Get Good Ratings

    Credit ratings are not the only tool to rely on when assessing bonds. Find out why they sometimes fall short.
  6. Forex Education

    The Ins And Outs Of Corporate Eurobonds

    Corporate eurobonds simplify expansion for MNCs, though there are a few more hoops to jump through.
  7. Bonds & Fixed Income

    Figuring Out How To Cover Your Liability Bases

    Whenever we talk about the asset-liability approach to portfolio management (ALM), the concepts of immunization and cash flow matching come into play.
  8. Economics

    Does A Junk Rating Reflect Russia's Fundamentals?

    Moody’s, like other credit rating agencies, has downgraded Russia’s sovereign debt rating to non-investment grade, but does this reflect Russia's economy?
  9. Economics

    What Would Happen If Interest Rates Rise?

    This time around, while U.S. long-term yields have rebounded from their January lows, rates have generally been lower than where they ended 2014.
  10. Investing

    The Impact Of A Stronger Dollar In The Markets

    The economy continues to improve, but also demonstrated that some areas of the stock market are more vulnerable to an increase in interest rates.

You May Also Like

Hot Definitions
  1. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  2. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  3. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
  4. Investment Grade

    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such ...
  5. Fringe Benefits

    A collection of various benefits provided by an employer, which are exempt from taxation as long as certain conditions are ...
  6. Irrevocable Trust

    A trust that can't be modified or terminated without the permission of the beneficiary. The grantor, having transferred assets ...
Trading Center