How Credit is Scored/Rated for Individuals, Companies, and Governments

The letters or numbers used to express a credit rating or credit score express the creditworthiness of the individual, business, or government being assessed. Credit ratings are usually expressed in letters such as "AAA" or "BB." Credit scores, which are normally assigned to individuals, are expressed as numbers ranging from 850 to 300.

Credit rating agencies assign ratings that express whether or not an entity is likely to be able to meet its debt obligations. There are three agencies that create the majority of the world's credit ratings: Fitch Ratings, Moody's Investors Service and Standard & Poor's.

Since the beginning of the 20th century, these three credit rating agencies have been producing ratings and investment analysis, but Fitch was the first to use the now common letter rating system. A typical credit rating scale uses the following letter ratings: AAA, AA, A, BBB, BB, B, CCC, CC, C, and D.

Pluses and minuses are added to letters AA through C to further distinguish ratings, and ratings are often also accompanied by outlook ratings. Symbolized by "NEG," "POS," "STA," "RUR" and "SD," these abbreviations stand for negative, positive, stable, rating under review and selective default, respectively.

These ratings are used by individual and institutional investors, who are trying to decide if they want to buy securities or investments backed by any country. Only triple-A credit ratings are considered to be top-notch. Ratings of BB or lower are considered to be "junk" ratings, while ratings between these two categories are OK but are under observation by the credit rating agencies.

Consumer credit scores are expressed in numbers rather than letters, and although scores are generated by each of the three major credit reporting agencies (Experian, Transunion, and Equifax), the most commonly used consumer credit score is the one created by Fair Isaac Corporation (FICO).

FICO scores range from 300 to 850. FICO scores above 800 are considered to be exceptional. Credit scores ranging from 740 to 799 are very good or above average, while scores ranging from 670 to 739 are good. Scores between 580 and 669 are considered below average or not good, while those lower than 580 are considered risky or bad. When a borrower's credit score expresses that they are risky, it simply means they have a higher likelihood of defaulting on the loan than a borrower with an excellent credit score.

Having a low credit score or a score that is considered to be risky does not necessarily mean that a lender will refuse to lend to you. However, the lender will be aware of the potential financial risk and may compensate by charging higher interest, having shorter terms or requiring a cosigner.

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  1. Moody's Investors Service. "Rating Symbols and Definitions," Page 30. Accessed July 7, 2020.

  2. Fair Isaac Corporation. "What Is a Credit Score?" Accessed Nov. 5, 2020.