Credit Rating

Key takeaways

• A credit rating is an independent assessment of a corporation’s or government’s ability to repay debt.
• Ratings are letter grades (e.g., AAA to C/D) that signal relative default risk.
• The three largest rating agencies are S&P Global, Moody’s, and Fitch.
• Ratings influence borrowing costs: lower ratings generally mean higher interest rates.

What is a credit rating?

A credit rating is an opinion—expressed as a letter grade—about the likelihood that an issuer (a company, government, or public agency) will meet its debt obligations. Investors and lenders use ratings to gauge default risk and to set expectations for the return (interest) required to compensate for that risk.

How ratings work

Ratings are typically assigned before bonds or other debt are issued. A higher rating indicates lower perceived risk and usually allows the issuer to borrow at lower interest rates. Lower-rated (speculative or “junk”) issuers must offer higher yields to attract investors. Ratings can be short-term (default risk within a year) or long-term (broader, forward-looking assessment).

Brief history

Credit rating practices emerged in the early 20th century and became widely adopted after regulators in the 1930s restricted banks from holding speculative bonds. Since the 2007–2008 financial crisis, regulatory oversight of rating agencies increased, including the creation of Office of Credit Ratings within the U.S. Securities and Exchange Commission.

Major credit rating agencies

The market is highly concentrated among three global firms:
* S&P Global (Standard & Poor’s)
Moody’s Investors Service
Fitch Ratings

These firms provide ratings, research, and analysis to help investors assess credit risk.

Rating scales and categories

Each agency uses a similar letter-based scale:
* Highest quality: AAA (S&P/Fitch) or Aaa (Moody’s)
Investment-grade vs. speculative: generally, ratings at or above BBB (or Baa for Moody’s) are considered investment grade; ratings below that are speculative (non-investment grade).
Modifiers: S&P and Fitch add “+” or “–” to fine-tune levels; Moody’s uses numerical modifiers (1–3).

Factors that influence ratings

Analysts consider both quantitative and qualitative factors, including:
* Payment history and past defaults
Amount and structure of outstanding debt
Cash flow generation and profitability
Economic and market conditions
Legal, political, or sector-specific risks that could impair repayment

Ratings reflect judgment and are subject to change as circumstances evolve.

Credit rating vs. credit score

A credit rating applies to an entity (company, government, bond issue). A credit score applies to an individual consumer and is based on personal credit history. Both serve similar functions: signaling credit risk to potential lenders.

Nationally Recognized Statistical Rating Organizations (NRSROs)

Some rating agencies are designated as NRSROs and are subject to regulatory oversight. The largest rating agencies (S&P, Moody’s, Fitch) are among those recognized by U.S. regulators.

Why ratings matter

• For issuers: higher ratings expand access to capital and lower borrowing costs.
• For investors: ratings help compare credit risk across issuers and decide whether expected returns sufficiently compensate for that risk.
• For markets: ratings influence investment mandates, pricing, and risk management.

Bottom line

Credit ratings are informed, standardized opinions about the creditworthiness of issuers and debt issues. They are a useful tool for investors and lenders but are not guarantees—ratings can change as an issuer’s financial picture or external conditions change.