Credit ratings are an important tool for borrowers to gain access to loans and credit cards. Good credit ratings allow people 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; this typically means that the better your credit rating, the better the terms of the loan. If your credit rating is poor, the bank may even reject you for a loan. This can impact your ability to obtain a mortgage or a credit card.
Personal credit ratings, or credit scores, range from 300 to 850. 690 and up is considered to be good while 720 and up is considered to be excellent. A bad credit score would be in the range from 300-629. It is important to check your credit score often and pay down any outstanding debt or resolve any issues impacting your credit score so that it can start to increase once again.
At the corporate level, it is usually in the best interest of a company to look for a credit rating agency to rate its debt. Investors oftentimes base part of their decision to buy a corporation's bonds, or even the stock, on the credit rating of the company's debt.
Major credit agencies, such as Moody's, Fitch Ratings, or Standard and Poor's, perform this rating service for a fee. Moody's and Standard and Poor's are located in the U.S. and control approximately 80% of the ratings market while Fitch is located in the U.S. and the United Kingdom and controls approximately 15% of the ratings market. Usually, investors will look at the credit rating given by these international agencies as well as ratings given by domestic rating agencies before deciding to invest. (For more, see: A Brief History of Credit Rating Agencies.)
The demarcation line for corporate credit rating is investment grade. Investment grade and above are considered to be less risky, while below investment grade carries more risk but sometimes more reward, particularly through higher yields on bonds.
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 financing to a country, such as foreign direct investment.
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. For example, Treasury bills from the United States are considered to be low risk because they carry the credit rating of the United States government. Because the U.S. is a country with a strong economy and low political risk, its credit rating benefits because of these factors.