Credit rating is an assessment of the creditworthiness of an individual, corporation, or country. It is an opinion on the creditworthiness of the borrower issued by a credit rating agency (CRA). The rating reflects the ability of the borrower to meet its financial obligations, such as repayment of debt, interest payments, and principal payments, among others.
Credit rating agencies assess a borrower’s creditworthiness based on various factors, such as financial statements, past credit history, and future prospects. They provide a credit rating in the form of a letter grade, ranging from AAA (highest creditworthiness) to D (default).
Credit rating agencies operate on a fee-based model, wherein the borrower pays the CRA for the rating service. The rating agencies are independent of the borrower and the lenders, and they provide an unbiased opinion on the creditworthiness of the borrower.
Credit ratings are widely used by lenders, investors, and other market participants to evaluate the creditworthiness of the borrower. A high credit rating enables a borrower to obtain credit at a lower interest rate, while a low credit rating may result in higher borrowing costs or denial of credit.
In addition to credit ratings for borrowers, credit rating agencies also provide ratings for debt instruments, such as bonds, and other financial instruments. The credit rating of a bond indicates the likelihood of the issuer defaulting on its payments. The higher the credit rating, the lower the risk of default, and the lower the interest rate that the issuer needs to pay to attract investors.