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A credit rating estimates the credit worthiness of an individual, corporation, or even a country. It is an evaluation made by credit bureaus of a borrower’s overall credit history. A credit rating is also known as an evaluation of a potential borrower's ability to repay debt, prepared by a credit bureau at the request of the lender (Black's Law Dictionary). Credit ratings are calculated from financial history and current assets and liabilities. Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan. However, in recent years, credit ratings have also been used to adjust insurance premiums, determine employment eligibility, and establish the amount of a utility or leasing deposit.

A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates, or the refusal of a loan by the creditor.

Personal credit ratings

An individual's credit score, along with his or her credit report, affects his or her ability to borrow money through financial institutions such as banks.

The factors which may influence a person's credit rating are:
  • ability to pay a loan
  • interest
  • amount of credit used
  • saving patterns
  • spending patterns
  • debt


In different parts of the world different personal credit rating systems exist.

North America

In the United States, an individual's credit history is compiled and maintained by companies called credit bureaus. Credit worthiness is usually determined through a statistical analysis of the available credit data.
  • A common form of this analysis is a 3-digit credit score provided by independent financial service companies such as the FICO credit score.
  • The term FICO is a registered trademark, comes from Fair Isaac Corporation, which pioneered the credit rating concept in the late 1950s.


In Canadamarker, the most common ratings are the North American Standard Account Ratings, also known as the "R" ratings, which have a range between R0 and R9. R0 refers to a new account; R1 refers to on-time payments; R9 refers to bad debt. Very few people maintain the R0 status for long, as there are similar mechanisms in place in Canada that would allow for monthly updates of one's credit rating.

North East Asia (South Korea & Japan)

Australasia (Australia & NZ)

European Union

Corporate credit ratings

The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds. These are assigned by credit rating agencies such as Standard & Poor's, Moody's or Fitch Ratings and have letter designations such as AAA, B, CC. The Standard & Poor's rating scale is as follows, from excellent to poor: AAA, AA, A, BBB, BB, B, CCC, CC, C, D. Anything lower than a BBB rating is considered a speculative or junk bond.The Moody's rating system is similar in concept but the naming is a little different. It is as follows, from excellent to poor: AAA, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C.

Sovereign credit ratings

A sovereign credit rating is the credit rating of a sovereign entity, i.e. a country. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors looking to invest abroad. It takes political risk into account.

Country risk rankings Least risky countries, Score out of 100 Source: Euromoney Country risk March 2008
Rank Previous Country Overall score
1 1 Luxembourgmarker 99.88
2 2 Norwaymarker 97.47
3 3 Switzerlandmarker 96.21
4 4 Denmarkmarker 93.39
5 5 Swedenmarker 92.96
6 6 Irelandmarker 92.36
7 10 Austriamarker 92.25
8 9 Finlandmarker 91.95
9 8 Netherlandsmarker 91.95
10 7 United Statesmarker 91.27



The table shows the ten least-risky countries for investment as of March 2008. Ratings are further broken down into components including political risk, economic risk. Euromoney's bi-annual country risk index "Country risk survey"monitors the political and economic stability of 185 sovereign countries. Results focus foremost on economics, specifically sovereign default risk and/or payment default risk for exporters (a.k.a. "trade credit" risk).

This article in the Guardian contains a map of S&P sovereign ratings.

Short term rating

A short term rating is a probability factor of an individual going into default within a year. This is in contrast to long-term rating which is evaluated over a long timeframe.

Credit rating agencies

Credit scores for individuals are assigned by credit bureaus (US; UK: credit reference agencies). Credit ratings for corporation and sovereign debt are assigned by credit rating agencies.

In the United States, the main credit bureaus are Experian, Equifax, and TransUnion. A relatively new credit bureau in the US is Innovis.

In the United Kingdom, the main credit reference agencies for individuals are Experian, Equifax, and Callcredit. There is no universal credit rating as such, rather each individual lender credit scores based on its own wish-list of a perfect customer.

In Canada, the main credit bureaus for individuals are Equifax, TransUnion and Northern Credit Bureaus/ Experian.

In India, commercial credit rating agencies include CRISIL, CARE and ICRA. The credit bureaus for individuals in India are Credit Information Bureau (India) Limited (CIBIL) and Credit Registration Office (CRO).

The largest commercial credit rating agencies (which tend to operate worldwide) are Moody's, Standard and Poor's and Fitch Ratings.

References

  1. "Consumer information center FAQ", Equifax
  2. "Country risk survey": Bi-annual survey which monitors the political and economic stability of 185 sovereign countries, according to ratings agencies and market experts. The information is compiled from Risk analysts; poll of economic projections; on GNI; World Bank’s Global Development Finance data; Moody’s Investors Service, Standard & Poor’s and Fitch IBCA; OECD consensus groups (source: ECGD); the US Exim Bank and Atradius UK; heads of debt syndicate and loan syndications; Atradius, London Forfaiting, Mezra Forfaiting and WestLB.
  3. "Student workbook", CIBC p. 14


See also






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