Credit rating
Evaluation of debtor's ability to repay debt or default.
Wikipedia / Wikimedia Commons
A credit rating is an evaluation of the credit risk of a prospective debtor, such as an individual, business, company, or government. It predicts or forecasts the ability of a supposed debtor to pay back debt or default, based on qualitative and quantitative information provided by the debtor and non-public information obtained by analysts. Note that credit ratings (typically assigned to entities or debt instruments by agencies) are distinct from credit scores (numeric evaluations of an individual's creditworthiness by credit bureaus).
- field
- Finance, risk assessment
- known_for
- Evaluating credit risk of debtors, including sovereign entities and corporations
- major_agencies
- Standard & Poor's, Moody's, Fitch Ratings, DBRS, A. M. Best
- rating_scales
- Letter designations such as A, B, C; variations with plus/minus or numbers
- time_horizons
- Short-term (≤1 year) and long-term (>1 year)
Lore & Background
Credit ratings are assigned by credit rating agencies, the largest of which are Standard & Poor's, Moody's, and Fitch Ratings, controlling approximately 95% of the business. They use letter designations such as A, B, C, with higher grades intended to represent a lower probability of default. Agencies do not attach a hard number of probability of default to each grade, preferring descriptive definitions. However, studies have estimated average risk and reward; for example, Moody's found that over a 5-year horizon, its highest rating (Aaa) had a cumulative default rate of 0.18%, while the lowest studied (B2) had 31.24%.
Reader's Guide
Sovereign credit ratings indicate the risk level of a country's investing environment, taking into account political risk. Euromoney's bi-annual country risk index monitors 185 sovereign countries, with Singapore often emerging as the least risky since 2017 and achieving AAA sovereign credit rankings from all major agencies. Corporate credit ratings address a corporation's financial instruments or the corporation itself. Different agencies use variations of alphabetical combinations; S&P uses uppercase letters and pluses/minuses, Moody's uses numbers and lowercase letters, and DBRS uses words like 'high' and 'low'. The European Central Bank recognizes only S&P, Moody's, Fitch, and DBRS for determining collateral requirements, using the highest rating among them. Ratings in Europe have been under scrutiny, particularly for countries like Spain, Ireland, and Italy, as they affect how much banks can borrow against sovereign debt.
Did You Know?
- A credit rating represents an evaluation from a credit rating agency of qualitative and quantitative information, including non-public information obtained by analysts.
- Singapore is one of only a few countries in the world to achieve AAA sovereign credit rankings from all major credit agencies, but it is not the only one in Asia—Hong Kong (a Special Administrative Region of China) and A
- Over a 5-year horizon, Moody's highest-rated bonds (Aaa) had a cumulative default rate of 0.18%, while the lowest studied (B2) had 31.24%.
- The European Central Bank uses a first-best rule among multiple accepted external credit assessment institutions, including but not limited to S&P, Moody's, Fitch, and DBRS, to determine haircuts and collateral requireme
Frequently Asked Questions
What is a credit rating?
A credit rating is an analyst-driven assessment of how likely a debtor—whether an individual, corporation, or government—is to repay borrowed money or default. It blends qualitative judgments with quantitative data supplied by the borrower and information gathered independently by rating analysts.
Who are the major credit rating agencies?
The most widely recognized agencies include Standard & Poor's, Moody's, Fitch Ratings, DBRS, and A. M. Best. They publish letter-based ratings that investors, lenders, and regulators rely on when gauging credit risk.
How do credit rating scales work?
Ratings are expressed as letter designations—typically A through C—often modified with plus/minus signs or numerical suffixes to indicate finer gradations of risk. A higher letter signals lower probability of default, while lower letters flag greater credit risk.
What's the difference between a credit rating and a credit score?
A credit score is a numeric value produced by a credit bureau that rates an individual's personal creditworthiness, whereas a credit rating is a broader letter-based evaluation that can apply to corporations, sovereigns, and other entities. In other words, credit scoring is a specific subset within the wider credit-rating framework.
What time horizons do credit ratings cover?
Ratings are split into short-term assessments covering obligations due within one year and long-term assessments covering obligations extending beyond one year. This distinction helps investors separate near-term liquidity risk from longer-run solvency risk.
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