Credit Rating

Credit Rating

An assessment of a borrower's creditworthiness 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, a corporation, a state or provincial authority or a sovereign government. The evaluation and evaluation of credit for companies and governments is usually carried out by a credit rating agency such as Standard & Poor's, Moody's or Fitch. These rating agencies are paid by the entity that seeks a credit rating for itself or for one of its debt problems.

OPENING 'Credit rating'
For people, credit ratings are derived from the credit history maintained by credit reporting agencies, such as Equifax (EFX), Experian and TransUnion (TRU).

A loan is essentially a promise, and a credit rating determines the likelihood that the borrower will pay a loan within the limits of the loan contract, without defaulting. A high credit rating indicates a high possibility of repaying the loan in full without any problem; A bad credit rating suggests that the borrower has had problems paying loans in the past, and could follow the same pattern in the future. The credit rating affects the possibilities of the entity to be approved for a given loan or to receive favorable terms for said loan.

Credit ratings apply to businesses and the government, while credit scores apply only to people. (An individual's credit score is reported as a number, usually between 300 and 850. For more details, see What is a good credit score?) Similarly, sovereign credit ratings apply to national governments and governments. Corporate credit ratings apply only to corporations.

Credit rating agencies normally assign letter grades to indicate ratings. Standard & Poor's, for example, has a credit rating scale ranging from AAA (excellent) and AA + to C and D. A debt instrument with a rating lower than BBB- is considered a speculative grade or a junk link, What it means is more likely to not meet the loans.

Why credit ratings are important
The credit ratings for borrowers are based on the substantial due diligence performed by the rating agencies. While a borrower will try to obtain the highest possible credit rating since it has a large impact on the interest rates charged by the lenders, the rating agencies must have a balanced and objective view of the borrower's financial situation and capacity. to pay the debt.

A credit rating not only determines whether a borrower will be approved for a loan, but also the interest rate at which the loan must be repaid. Since businesses rely on loans for many start-up and other expenses, refusing a loan could spell disaster, and a high interest rate is much harder to repay. Credit ratings also play an important role in determining a potential buyer to buy or not to buy bonds. A bad credit rating is a risky investment; indicates a greater probability that the company does not pay its bonds. To learn more about why a high credit score is essential to a business, read The Importance of Your Credit Rating.

It is important that a borrower remain diligent to maintain a high credit rating. Credit ratings are never static; in fact, they change all the time according to the most recent data, and a negative debt will reduce even the best rating. Credit also takes time to accumulate. If an entity has good credit but a short credit history, that does not look as positive as the same credit quality, but with a long history. Debtors want to know that a borrower can maintain good credit steadily over time.

Changes in the credit rating can have a significant impact on financial markets. A good example of this effect is the adverse market reaction to the credit rating downgrade of the US federal government. UU On the part of Standard & Poor's on August 5, 2011. Global stock markets plummeted for weeks after the rebate.

Factors affecting credit ratings and credit scores
There are some factors that credit bureaus take into consideration when assigning a credit rating to an organization. In first