What is a ‘Credit Rating’?
An assessment of the creditworthiness 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, Moody’s or Fitch.Moody’s was the first agency to issue publicly available credit ratings for bonds, in 1909, and other agencies followed suit in the decades after.These rating agencies are paid by the entity that is seeking a credit rating for itself or for one of its debt issues.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, which means it is more likely to default on loans.There are a few factors credit agencies take into consideration when assigning a credit rating to an organization.First, the agency considers the entity’s past history of borrowing and paying off debts. Any missed payments or defaults on loans negatively impact the rating.The agency also looks at the entity’s future economic potential. If the economic future looks bright, the credit rating tends to be higher; if the borrower does not have a positive economic outlook, the credit rating will fall.
