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Credit rating
A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by a credit rating agency of the debt issuers likelihood of default.[1] Credit ratings are determined by credit ratings agencies. The credit rating represents the credit rating Credit rating of governments around the world by Standard & Poor's: agency's evaluation of qualitative and AAAAAABBBBBBnot rated quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts. Credit ratings are not based on mathematical formulas. Instead, credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government. The credit rating 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. 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. The 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 scores
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:[2] ability to pay a loan interest amount of credit used saving patterns
spending patterns debt In different parts of the world different personal credit score systems exist.
Credit rating
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. The most common form of credit score, known as the FICO credit score, however, the actual score is computed by credit bureaus. The term FICO is a registered trademark of Fair Isaac Corporation, which developed FICO and pioneered the credit rating concept in the late 1950s. In Canada, individuals receive credit ratings such as 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.
Long-term Short-term Long-term Short-term Long-term Short-term Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 P-3 P-2 P-1 AAA AA+ AA AAA+ A ABBB+ BBB BBBA-3 A-2 A-1 A-1+ AAA AA+ AA AAA+ A ABBB+ BBB BBBF3 F2 Lower medium grade F1 Upper medium grade F1+ Prime High grade
Credit rating
3
Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca Not prime BB+ BB BBB+ B BCCC+ CCC CCCCC C C / / D / DDD DD D / In default C B BB+ BB BBB+ B BCCC C Substantial risks Extremely speculative In default with little prospect for recovery Highly speculative B Non-investment grade speculative
Country risk rankings (June 2011) Rank 1 2 3 4 5 6 7 8 9 Previous 1 6 2 4 3 12 5 7 6 Country Norway Luxembourg Switzerland Denmark Sweden Singapore Finland Canada Netherlands
[5] [6]
Overall score 92.44 90.86 90.20 89.07 88.72 87.65 87.31 87.24 86.97
Credit rating
4
10 13 Germany 85.73
The table shows the ten least-risky countries for investment as of June 2011. Ratings are further broken down into components including political risk, economic risk. Euromoney's bi-annual country risk index[7] 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"[8] 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 institutional 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.
Credit rating
References
[1] Kronwald, Christian (2009). Credit Rating and the Impact on Capital Structure (http:/ / books. google. com/ books?id=CzjS5YV5nK8C& printsec=frontcover& dq="credit+ rating"& hl=en& ei=KPMxTuLRCMyBtgeTwImYDQ& sa=X& oi=book_result& ct=result& resnum=2& ved=0CEoQ6AEwAQ#v=onepage& q="credit rating"& f=false). Norderstedt, Germany: Druck und Bingdung. p.3. ISBN978-3-640-57549-7. . [2] "Consumer information center FAQ" (http:/ / www. equifax. com/ EFX_Canada/ consumer_information_centre/ faqs_e. html#ques14). Equifax.com. . Retrieved 2011-08-08. [3] de Servigny, Arnaud and Olivier Renault (2004). The Standard & Poor's Guide to Measuring and Managing Credit Risk. McGraw-Hill. ISBN978-0071417556. [4] "Credit rating companies and their impact on the economy" (http:/ / www. forexpromos. com/ what-are-credit-rating-companies-and-their-impact-on-the-economy). Forexpromos.com. . Retrieved 2011-08-08. [5] "Country risk survey" (http:/ / www. euromoneycountryrisk. com/ ) previous ranking from Euromoney Country risk September 2010 [6] "Country Risk Full Results" (http:/ / www. euromoney. com/ Article/ 2675660/ Country-risk-Full-results. html): Originally 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 Banks Global Development Finance data; Moodys Investors Service, Standard & Poors 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. [7] "Country risk survey" (http:/ / www. euromoney. com/ poll/ 10683/ PollsAndAwards/ Country-Risk. html). Euromoney.com. . Retrieved 2011-08-08. [8] "Country Risk" (http:/ / www3. ambest. com/ ratings/ cr/ crisk. aspx?l=1& Menu=Country+ Risk). ambest.com. . Retrieved 2011-08-08. [9] Holden Lewis (2002-14-14). "The credit report you don't know about" (http:/ / www. bankrate. com/ brm/ news/ mortgages/ 20021114a. asp). Bankrate.com. . Retrieved 2007-09-24. [10] Martin Lewis. "Credit Ratings: How they work" (http:/ / www. moneysavingexpert. com/ banking/ credit-rating-credit-score). MoneySavingExpert.com. . Retrieved 2008. [11] "Student workbook" (http:/ / www. cibc. com/ ca/ pdf/ student-workbook-en. pdf), CIBC p. 14 [12] Vanessa Chris (2009-03-31). "Canada Loses a Credit Bureau" (http:/ / www. spendonlife. ca/ blog/ canada-loses-credit-bureau). Spendonlife.ca. . Retrieved 2011-08-08. [13] "Credit Rating Agency in India" (http:/ / www. brickworkratings. com). Brickwork Ratings. . Retrieved 2011-08-08. [14] "Ctrisks" (http:/ / www. ctrisks. com). Ctrisks. . Retrieved 2011-08-08. [15] Eschenbacher, Stefanie (2010-11-15). "Chinese downgrade for American treasuries" (http:/ / www. fundstrategy. co. uk/ markets/ chinese-downgrade-for-american-treasuries/ 1021876. article). Fundstrategy.co.uk. . Retrieved 2011-08-08.
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