what is a credit rating 
a credit rating is an independent assessment of the ability of a corporation or a government to repay a debt either in general terms or regarding a specific financial obligation credit scores are assigned to individuals based on their personal history of acquiring and repaying debt they are checked by lenders considering loaning money to a consumer credit ratings are issued to companies and governments by several companies including s p global moody s and fitch ratings credit ratings are used by investors who want to know the risk of buying bonds or other debt instruments issued by these entities understanding credit ratingscredit ratings are an estimate of the level of risk involved in lending money to a business or other entity including national and state governments and government agencies a high credit rating indicates that in the rating agency s opinion a bond issuer is likely to repay its debts to investors without difficulty a low credit rating suggests it might struggle to make its payments the lowest ratings indicate the borrower is in real financial trouble bonds receive credit ratings before they are issued the interest they pay is based on the credit rating they receive a lower rated company is forced to pay a higher interest rate to compensate for the risk of the investment investors and lenders use credit ratings to decide whether to do business with the rated entity and to determine how much interest they would expect to receive to compensate them for the risk involved 1credit rating agencies typically assign letter grades to the entities they rate s p global for instance has a bond credit rating scale ranging from aaa excellent down to c and d moody s scale ranges from aaa to c 45credit ratings also reflect different time horizons short term credit ratings reflect the likelihood that a borrower will default on a debt within the year this type of credit rating has become the norm in recent years whereas long term credit ratings were more influential in the past long term credit ratings predict the borrower s likelihood of defaulting at any given time in the extended future 5a brief history of credit ratingscredit ratings date back to the early 20th century they became particularly influential after 1936 when federal banking regulators issued rules prohibiting banks from investing in speculative bonds bonds with low credit ratings the aim was to avoid the risk of default which could lead to financial losses and even bank failures other companies and financial institutions quickly adopted this practice relying on credit ratings became the norm 6the major credit rating agenciesthe global credit rating industry is highly concentrated with three agencies controlling most of the market moody s s p global and fitch ratings all three are nationally recognized statistical rating organizations nrsros overseen by the u s securities and exchange commission here is a quick overview of each john knowles fitch founded the fitch publishing company in 1913 providing financial statistics for the investment industry via the fitch stock and bond manual and the fitch bond book in 1924 fitch introduced an aaa through d rating system 7nearly a century later fitch ratings employs more than 1 550 analysts in 36 global offices 8john moody first published moody s manual of industrial and miscellaneous securities in 1900 the manual provided basic statistics and general information about stocks and bonds of companies in several industries but it did not rate them 9in 1909 moody began publishing moody s analyses of railroad investments and for the first time rated many railway company securities 10 five years later moody began offering similar ratings for public utilities and other industries 11today moody s investors service is a global enterprise with more than 40 offices providing ratings and research on companies and governments across the world 12s p global s roots date to 1860 when henry varnum poor published the history of railroads and canals in the united states providing investors with data on the railway industry nearly half a century later in 1906 luther lee blake launched the standard statistics bureau which offered similar data on companies in other industries 13poor s publishing issued its first credit ratings in 1916 and standard statistics followed in 1922 the two organizations merged in 1941 to form standard poor s corporation 13standard poor s corporation was acquired by the mcgraw hill companies in 1966 and the company rebranded as s p global in 2016 today s p global has more than 70 offices in 35 countries 14importance of credit ratingscredit ratings are important not only for prospective investors but for the entities that they rate a high rating can give a company or government access to the capital it needs at interest rates it can afford a low one can mean that the borrower has to pay much higher rates if it can access capital at all the entities themselves typically request that they or the securities they issue be rated and they pay the rating agencies for doing so 15credit ratings scalewhile each rating agency uses a slightly different scale they assign ratings as letter grades in general a rating of aaa is the highest possible credit rating while a c or d rating is the lowest 3the rating scales for long term debt at the three leading agencies are illustrated below there can be further divisions in each letter rating for example s p assigns a or for ratings between ccc and aa indicating a slightly higher or lower level of creditworthiness for moody s the distinction is made by adding a number between 1 and 3 a baa2 rating is slightly better than a baa3 and slightly worse than a baa1 21all three credit rating agencies divide their ratings into two general categories based on their assessed level of risk for s p global ratings of bbb and higher are considered investment grade while grades of bb and lower are considered speculative 5 for moody s baa3 and up is investment grade while ba1 and below is non investment grade 2 with fitch bbb and higher is investment grade with bb and lower being speculative 16factors that go into credit ratingscredit rating agencies consider a wide range of factors in forming their opinions and each has its own formula in general the major factors that influence the credit rating are note that credit ratings involve some judgment calls on the part of the agency and are subject to change even an entity with a spotless payment history can be downgraded if the rating agency believes its ability to make repayments will be impaired 15