What is Credit Rating?

Spain: Credit rating downgraded by S&P

Standard & Poor’s (S&P) has cut Spain’s long-term credit rating by one notch, from AA to AA-, the rating has been revised in wake of weak growth and high levels of private sector debt in Spain. The ratings agency added that the country’s high unemployment would remain a drag on the economy.

Last week, the Fitch agency also cut Spain’s rating, a process that can raise a country’s borrowing costs. S&P’s move comes as G20 finance ministers are due to meet today to discuss the euro-zone crisis.

What is Credit Rating?

  • Credit Rating is determined by Credit Rating agencies and is an evaluation of the debt issuers likelihood of default
  • Evaluates the credit worthiness of an issuer of specific types of debt
  • Represents the credit rating agency’s evaluation of qualitative and quantitative information for a company or government;
  • Please note that generally Credit Ratings are NOT based on mathematical formulas instead Credit rating agencies use their judgment and experience in determining what public and private information .
  • It is used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations.

What is Credit Scores?

  • Credit Ratings are often confused with Credit Scores
  • Credit scores are the output of mathematical algorithms that assign numerical values to information in an individual’s credit report
  • Credit Report contains information regarding the financial history and current assets and liabilities of an individual
  • A bank or credit card company will use the credit score to estimate the probability that the individual will pay back loan or will pay back charges on a credit card.
    However, in recent years, credit scores have also been used to adjust insurance premiums, determine employment eligibility, as a factor considered in obtaining security clearances and establish the amount of a utility or leasing deposit.
  • A poor credit rating indicates a credit rating agency’s opinion that the company or government has a high risk of defaulting, based on the agency’s analysis of the entity’s history and analysis of long term economic prospects.
  • A poor credit score indicates that in the past, other individuals with similar credit reports defaulted on loans at a high rate. The credit score does not take into account future prospects or changed circumstances. For example, if an individual received a credit score of 400 on Monday because he had a history of defaults, and then won the lottery on Tuesday, his credit score would remain 400 on Tuesday because his credit report does not take into account his improved future prospects.

Credit Score of an Individual:-

An individual’s credit score, along with his credit report, affects his or her ability to borrow money through financial institutions such as banks. The factors that may influence a person’s credit score are:

  • ability to pay a loan
  • interest
  • amount of credit used
  • saving patterns
  • spending patterns
  • debt

Corporate credit ratings

The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds. Credit rating is usually of a financial instrument such as a bond, rather than the whole corporation. These are assigned by credit rating agencies such as A. M. Best, Dun & Bradstreet, Standard & Poor’s, Moody’s or Fitch Ratings and have letter designations such as A, B, C.

Sovereign credit ratings

A sovereign credit rating is the credit rating of a sovereign entity, i.e., a national government. 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”: The risk that country-specific factors could adversely affect an insurer’s ability to meet its financial obligations.

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