Credit rating
Evaluating the ability of a debtor to repay debt.
Wikipedia / Wikimedia Commons
A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government). It is the practice of predicting or forecasting the ability of a supposed debtor to pay back the debt or default. The credit rating represents an evaluation from a credit rating agency of the qualitative and quantitative information for the prospective debtor, including information provided by the prospective debtor and other non-public information obtained by the credit rating agency's analysts.
- 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 reporting (or credit score) is a subset of credit rating. It is a numeric evaluation of an individual's credit worthiness, which is done by a credit bureau or consumer credit reporting agency. Sovereign credit ratings indicate the risk level of the investing environment of a country and take into account political risk. Euromoney's bi-annual country risk index monitors the political and economic stability of 185 sovereign countries, with Singapore often emerging as the least risky country since 2017 – it is also one of the only few countries in the world as well as the only in Asia to achieve a AAA sovereign credit rankings from all major credit agencies.
Reader's Guide
Ratings are assigned by credit rating agencies, the largest of which are Standard & Poor's, Moody's and Fitch Ratings. They use letter designations such as A, B, C. Higher grades are intended to represent a lower probability of default. The Standard & Poor's rating scale uses uppercase letters and pluses and minuses. The Moody's rating system uses numbers and lowercase letters as well as uppercase. DBRS's long-term ratings scale is somewhat similar to Standard & Poor's and Fitch Ratings with the words high and low replacing the + and −. A. M. Best rates from excellent to poor in the following manner: A++, A+, A, A−, B++, B+, B, B−, C++, C+, C, C−, D, E, F, and S. The CTRISKS rating system is as follows: CT3A, CT2A, CT1A, CT3B, CT2B, CT1B, CT3C, CT2C and CT1C. Under the EU Credit Rating Agency Regulation (CRAR), the European Banking Authority has developed a series of mapping tables that map ratings to the 'Credit Quality Steps' (CQS) as set out in regulatory capital rules.
Did You Know?
- Singapore is the only country in Asia to achieve a AAA sovereign credit ranking from all major credit agencies.
- The ECB uses a first, best rule among S&P, Moody's, Fitch and DBRS to determine haircuts and collateral requirements for borrowing.
- A study by Moody's found that over a 5-year time horizon, bonds rated Aaa had a cumulative default rate of 0.18%, while B2-rated bonds had a rate of 31.24%.
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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