1.

Definiton of credit ratings:

 A credit rating is a quantified assessment of the creditworthiness of a
borrower in general terms or with respect to a particular debt or financial
obligation.
 Credit ratings determine not only whether or not a borrower will be
approved for a loan or debt issue but also the interest rate at which the
loan will need to be repaid.
 A credit rating or score can be assigned to any entity that seeks to borrow
money—an individual, a corporation, a state or provincial authority, or a
sovereign government.
 Individual credit is rated on a numeric scale based on the FICO calculation;
bonds issued by businesses and governments are rated by credit agencies
on a letter-based system.

2. Understanding about credit ratings:

A loan is a debt—essentially a promise, often contractual—and a

credit rating determines the likelihood that the borrower will be
able and willing to pay back a loan within the confines of the loan
agreement without defaulting. A high credit rating indicates a
strong possibility of paying back the loan in its entirety without
any issues; a poor credit rating suggests that the borrower has
had trouble paying back loans in the past and might follow the
same pattern in the future. The credit rating affects the entity’s
chances of approval for a given loan and favorable terms for that
loan.

3. Credit ratings and credit scores:

Credit ratings apply to businesses and governments. For example,

sovereign credit ratings apply to national governments, while
corporate credit ratings apply solely to corporations. Credit
scores, on the other hand, apply only to individuals. Credit scores
 are derived from the credit history maintained by credit-reporting
agencies such as Equifax, Experian, and TransUnion. An
individual’s credit score is reported as a number, generally ranging
from 300 to 850 (see more under Factors Affecting Credit Ratings
and Credit Scores).

A short-term credit rating reflects the likelihood that a borrower

will default within the year. This type of credit rating has become
the norm in recent years, whereas in the past, long-term credit
ratings were more heavily considered. Long-term credit ratings
predict the borrower’s likelihood of defaulting at any given time in
the extended future.

Credit rating agencies typically assign letter grades to indicate

ratings. S&P Global, for instance, has a credit rating scale ranging
from AAA (excellent) to C and D. A debt instrument with a rating
below BB is considered to be a speculative-grade or junk bond,
which means it is more likely to default on loans.

4. Importance of credit ratings:

Credit ratings for borrowers are based on substantial due

diligence conducted by the rating agencies. Though a borrowing
entity will strive to have the highest possible credit rating because
it has a major impact on interest rates charged by lenders, the
rating agencies must take a balanced and objective view of the
borrower’s financial situation and capacity to service/repay the
debt.

A credit rating determines not only whether or not a borrower

will be approved for a loan but also the interest rate at which the
loan will need to be repaid. As companies depend on loans for
many startup and other expenses, being denied a loan could spell
disaster, and a high-interest-rate loan is much more difficult to
pay back. One's credit rating should play a role in determining
which lenders to apply to for a loan. The right lender for someone
with great credit likely will be different than for someone with
good or even poor credit.

Credit ratings also play a large role in a potential investor’s

decision as to whether or not to purchase bonds. A poor credit
rating is a risky investment; it indicates a larger probability that
the company will be unable to make its bond payments.

AA+

The credit rating of the U.S. government by Standard & Poor’s,

which reduced the country’s rating from AAA (outstanding) to
AA+ (excellent) on Aug. 5, 20111718

It is important for a borrower to remain diligent in maintaining a

high credit rating. Credit ratings are never static; in fact, they
change all the time based on the newest data, and one negative
debt will bring down even the best score. Credit also takes time to
build up. An entity with good credit but a short credit history is
not viewed as positively as another entity with equally good credit
but a longer credit history. Debtors want to know a borrower can
maintain good credit consistently over time. Considering how
important it is to maintain a good credit rating, it's worth looking
into the best credit monitoring services and perhaps choosing one
as a means of ensuring your information remains safe.
 Credit rating changes can have a significant impact on financial
markets. A prime example is the adverse market reaction to the
credit rating downgrade of the U.S. federal government by
Standard & Poor’s on Aug. 5, 2011.18 Global equity markets
plunged for weeks following the downgrade.19

5. Factors Affecting Credit Ratings and Credit Scores:

Credit agencies take into consideration several factors when

assigning a credit rating to an organization. First, an agency
considers the entity’s past history of borrowing and paying off
debts. Any missed payments or defaults on loans negatively
impact the rating. The agency also looks at the entity’s future
economic potential. If the economic future looks bright, the credit
rating tends to be higher; if the borrower does not have a positive
economic outlook, the credit rating will fall.

For individuals, a high numerical credit score from the credit-

reporting agencies indicates a stronger credit profile and will
generally result in lower interest rates charged by lenders. A
number of factors are taken into account for an individual’s credit
score, some of which have greater weight than others. Details on
each credit factor can be found in a credit report, which typically
accompanies a credit score.

These five factors are included and weighted to calculate a

person’s FICO credit score: arrayed from most important to the
least important
Payment history (35%)

Amounts owed (30%)

Length of credit history (15%)

New credit (10%)

Types of credit (10%)

As noted above, FICO scores range from a low of 300 to a high of

850—a perfect credit score that is achieved by only about 1% of
the populace.21 Generally, a very good credit score is one that is
740 or higher. This score will qualify a person for the best interest
rates on a mortgage and the most favorable terms on other lines
of credit. With a credit score that falls between 580 and 740,
financing for certain loans can often be secured but with interest
rates rising as the credit score falls. People with credit scores
below 580 may have trouble finding any type of legitimate credit.

It is important to note that FICO scores do not take age into

consideration, but they do weight the length of one's credit
history. Even though younger people may be at a disadvantage, it
is possible for people with short histories to get favorable scores
depending on the rest of the credit report. Newer accounts, for
example, will lower the average account age, which could lower
the credit score. FICO likes to see established accounts. Young
people with several years' worth of credit accounts and no new
accounts that would lower the average account age can score
higher than young people with too many accounts or those who
have recently opened an account.