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.[1] 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[failed verification]
- 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, 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
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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 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 | P-1 | AAA | A-1+ | AAA | F1+ | Prime |
| Aa1 | AA+ | AA+ | High grade | |||
| Aa2 | AA | AA | ||||
| Aa3 | AA- | AA- | ||||
| A1 | A+ | A-1 | A+ | F1 | Upper medium grade | |
| A2 | A | A | ||||
| A3 | P-2 | A- | A-2 | A- | F2 | |
| Baa1 | BBB+ | BBB+ | Lower medium grade | |||
| Baa2 | P-3 | BBB | A-3 | BBB | F3 | |
| Baa3 | BBB- | BBB- | ||||
| Ba1 | Not prime | BB+ | B | BB+ | B | Non-investment grade speculative |
| Ba2 | BB | BB | ||||
| Ba3 | BB- | BB- | ||||
| B1 | B+ | B+ | Highly speculative | |||
| B2 | B | B | ||||
| B3 | B- | B- | ||||
| Caa1 | CCC+ | C | CCC | C | Substantial risks | |
| Caa2 | CCC | Extremely speculative | ||||
| Caa3 | CCC- | In default with little prospect for recovery | ||||
| Ca | CC | |||||
| C | ||||||
| C | D | / | DDD | / | In default | |
| / | DD | |||||
| / | 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.
| Rank | Previous | Country | Overall score |
|---|---|---|---|
| 1 | 1 | Norway | 93.33 |
| 2 | 3 | Switzerland | 90.22 |
| 3 | 6 | Sweden | 88.93 |
| 4 | 4 | Denmark | 88.80 |
| 5 | 5 | Finland | 88.55 |
| 6 | 2 | Luxembourg | 88.27 |
| 7 | 8 | Canada | 88.26 |
| 8 | 9 | Netherlands | 88.20 |
| 9 | 16 | Hong Kong | 87.18 |
| 10 | 10 | Australia | 86.18 |
The table shows the ten least-risky countries for investment as of September 2010. Ratings are further broken down into components including political risk, 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, the Basel II agreement requires banks to report their one-year probability if they applied internal-ratings-based approach for capital requirements. 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
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.
See also
- List of countries by credit rating
- Alternative data
- Credit risk
- Default (finance)
- Credit history
- Credit score
- Risk-based pricing
References
- ^ Sullivan, Arthur (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 512. ISBN 0-13-063085-3.
{{cite book}}: Unknown parameter|coauthors=ignored (|author=suggested) (help)CS1 maint: location (link) - ^ "Consumer information center FAQ", Equifax
- ^ de Servigny, Arnaud and Olivier Renault (2004). The Standard & Poor's Guide to Measuring and Managing Credit Risk. McGraw-Hill. ISBN 13 978-0071417556.
{{cite book}}: Check|isbn=value: length (help) - ^ "Country risk survey": Bi-annual survey which monitors the political and economic stability of 185 sovereign countries, according to ratings agencies and market experts. The information is compiled from Risk analysts; poll of economic projections; on GNI; World Bank’s Global Development Finance data; Moody’s Investors Service, Standard & Poor’s and Fitch IBCA; OECD consensus groups (source: ECGD); the US Exim Bank and Atradius UK; heads of debt syndicate and loan syndications; Atradius, London Forfaiting, Mezra Forfaiting and WestLB.
- ^ Holden Lewis (2002-14-14). "The credit report you don't know about". Bankrate.com. Retrieved 2007-09-24.
{{cite news}}: Check date values in:|date=(help) - ^ Martin Lewis. "Credit Ratings: How they work". MoneySavingExpert.com. Retrieved 2008.
{{cite news}}: Check date values in:|accessdate=(help) - ^ "Student workbook", CIBC p. 14
- ^ [1]
- ^ [2]
- ^ http://www.fundstrategy.co.uk/markets/chinese-downgrade-for-american-treasuries/1021876.article Chinese downgrade for American treasuries