CREDIT RATING

A credit rating estimates the credit worthiness of an individual, corporation, or even a country.
It is an evaluation made by credit bureaus of a borrower’s overall credit history. A credit rating
is also known as an evaluation of a potential borrower's ability to repay debt, prepared by a credit
bureau at the request of the lender (Black's Law Dictionary). Credit ratings are calculated from
financial history and current assets and liabilities. Typically, a credit rating tells a lender or
investor the probability of the subject being able to pay back a loan. However, in recent years,
credit ratings have also been used to adjust insurance premiums, determine employment
eligibility, and establish the amount of a utility or leasing deposit.

A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest
rates, or the refusal of a loan by the creditor.

Personal credit ratings

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 rating are:[2]

 ability to pay a loan

 interest
 amount of credit used
 saving patterns[not in citation given]
 spending patterns
 debt

In different parts of the world different personal credit rating systems exist.

North America

In the United States, an individual's credit history is compiled and maintained by companies
called credit bureaus. Credit worthiness is usually determined through a statistical analysis of the
available credit data.

 A common form of this analysis is a 3-digit credit score provided by independent

financial service companies such as the FICO credit score.
 The term FICO is a registered trademark, comes from Fair Isaac Corporation, which
pioneered the credit rating concept in the late 1950s.

In Canada, the most common ratings are the North American Standard Account Ratings, also
known as the "R" ratings, which have a range between R0 and R9. R0 refers to a new account;
R1 refers to on-time payments; R9 refers to bad debt. Very few people maintain the R0 status for
long, as there are similar mechanisms in place in Canada that would allow for monthly updates
of one's credit rating.

Australasia (Australia and NZ)

In Australia, The Australian Government "Office of the Privacy Commissioner" provides

information on how to obtain a copy of your credit report. Personal credit reports in Australia are
generally required to be given free of charge.

There are two main credit reporting agencies, "Veda Advantage" and "Dun & Bradstreet"

People living in Tasmania can also contact "Tasmanian Collection Service"

European Union

S&P's ratings of European countries (March 2011).

  AAA
  AA
  A
  BBB
  BB
  B
  no rating
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Corporate credit ratings

Main article: Bond credit rating

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 bonds, 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. The Standard & Poor's rating scale is as follows, from excellent to poor: AAA, AA+, AA,
AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D.
Anything lower than a BBB- rating is considered a speculative or junk bond.[3] The Moody's
rating system is similar in concept but the naming is a little different. It is as follows, from
excellent to poor: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2,
B3, Caa1, Caa2, Caa3, Ca, C. 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. All these
CTRISKS grades are mapped to one-year probability of default.

Moody's S&P Fitch  

Long-term Short-term Long-term Short-term Long-term Short-term  
Aaa AAA AAA Prime
Aa1 AA+ AA+
A-1+ F1+
Aa2 AA AA High grade
P-1
Aa3 AA- AA-
A1 A+ A+
A-1 F1
A2 A A Upper medium grade
A3 A- A-
P-2 A-2 F2
Baa1 BBB+ BBB+
Baa2 BBB BBB Lower medium grade
P-3 A-3 F3
Baa3 BBB- BBB-
Ba1 BB+ BB+
Non-investment grade
Ba2 BB BB
speculative
Ba3 BB- BB-
B B
B1 B+ B+
B2 B B Highly speculative
B3 B- B-
Caa1 CCC+ Substantial risks
Not prime
Caa2 CCC Extremely speculative
Caa3 CCC- C CCC C
In default with little
CC
Ca prospect for recovery
C
C DDD
/ D / DD / In default
/ D

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.
 Source: Euromoney Country risk September 2010[4]
Country risk rankings (September 2010) The table
Least risky countries, Score out of 100 Previous Country Overall score shows the ten
Rank least-risky
1 1 Norway 93.33 countries for
2 3 Switzerland 90.22 investment as
of September
3 6 Sweden 88.93
2010. Ratings
4 4 Denmark 88.80 are further
5 5 Finland 88.55 broken down
6 2 Luxembourg 88.27 into
7 8 Canada 88.26 components
8 9 Netherlands 88.20 including
9 16 Hong Kong 87.18 political risk,
10 10 Australia 86.18 economic
risk.
Euromoney's bi-annual country risk index "Country risk survey" monitors the political and
economic stability of 185 sovereign countries. Results focus foremost on economics, specifically
sovereign default risk and/or payment default risk for exporters (a.k.a. "trade credit" risk).

A.M. Best defines "country risk" as the risk that country-specific factors could adversely affect
an insurer's ability to meet its financial obligations.

Short-term rating
A short-term rating is a probability factor of an individual going into default within a year. This
is in contrast to long-term rating which is evaluated over a long timeframe. In the past
insitutional investors preferred to consider long-term ratings. Nowadays, short-term ratings are
commonly used. First, Basel II agreement requires banks to report their one-year probability if
their apply internal-ratings-based approach for capital reqirements. Second, many institutional
investors can easily manage their credit/bond portfolios with derivatives on monthly or quarterly
basis. Therefore, some rating agencies simply report short-term ratings. In Greater China,
CTRISKS is the first CRA providing short-term ratings on sovereign risk, bank risk and
corporations in the region.

Credit bureaus and credit rating agencies

Main articles: Credit bureau and Credit rating agency

Credit scores for individuals are assigned by credit bureaus (US; UK: credit reference agencies).
Credit ratings for corporations and sovereign debt are assigned by credit rating agencies.

In the United States, the main credit bureaus are Experian, Equifax, and TransUnion. A relatively
new credit bureau in the US is Innovis.[5]
In the United Kingdom, the main credit reference agencies for individuals are Experian, Equifax,
and Callcredit. There is no universal credit rating as such, rather each individual lender credit
scores based on its own wish-list of a perfect customer.[6]

In Canada, the main credit bureaus for individuals are Equifax, TransUnion and Northern Credit
Bureaus/ Experian.[7]

In India, commercial credit rating agencies include CRISIL, CARE, ICRA and Brickwork
Ratings.[8] The credit bureaus for individuals in India are Credit Information Bureau (India)
Limited (CIBIL) and Credit Registration Office (CRO).

In Hong Kong, the locally-based credit rating agency is CTRISKS.[9] The firm offers sovereign
ratings on major economies, bank ratings on banks in China, Taiwan, Hong Kong and Macau,
obligor ratings on 4000 listed companies in Greater China, bonds ratings on 1000+ bonds in
China, Taiwan and Hong Kong and product risk ratings on 1000+ investment products.

The largest commercial credit rating agencies (which tend to operate worldwide) are Dun &
Bradstreet, Moody's, Standard and Poor's and Fitch Ratings.[citation needed]

On 14.07.2010 Dagong International Credit Rating Co. from China released a credit rating that is
a break with other western credit rating agencies in an attempt to compete with them.[10]

Information and Rating Agency Credo Line is the only Rating Agency in Ukraine which assigns
short-term and long-term credit ratings to Ukrainian, CIS and Eastern-European importing
companies in the course of their foreign economic activity and trade financing, in particular.