What is a credit rating?
A credit rating is a grade awarded by credit rating agencies to a sovereign state or large corporate borrower indicating the probability of default and their creditworthiness. It is a large-scale version of the credit score awarded to individuals who wish to borrow. The higher the rating, the lower the interest rate the borrower will face.
Where have you heard about credit ratings?
Any change in a country's credit rating, especially a lowering of its rating, is usually big news, being taken as a sign that its economic prospects have worsened. Similarly, large companies whose ratings are cut will find it harder to borrow in capital markets.
What you need to know about credit ratings.
They are issued by credit rating agencies of which the best-known are Moody's, Standard & Poor's and Fitch. The grading system is slightly different in each case but AAA or similar is the highest rating, while anything below B is considered high risk investment. Generally speaking, the higher the rating the less the government or company will have to pay to borrow money. The reverse is also true, which is why low-rated or 'junk' bonds are sometimes referred to as 'high yield'.
The agencies will constantly monitor the borrowers, deciding whether new developments are 'credit negative' or 'credit positive'. Borrowers are also assessed on how likely they are to default within set time frames; so those who are likely to default within a year are given a short-term credit rating and a long-term credit rating is given to those who are assessed over an extended time frame.
Find out more about credit ratings.
To learn more about credit ratings and their role in capital markets, see our definition of debt.