A credit rating agency (CRA) is a company that assigns credit ratings for issuers of

certain types of debt obligations as well as the debt instruments themselves. In some
cases, the servicers of the underlying debt are also given ratings.

In most cases, the issuers of securities are companies, special purpose entities, state and
local governments, non-profit organizations, or national governments issuing debt-like
securities (i.e., bonds) that can be traded on a secondary market. A credit rating for an
issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a
loan), and affects the interest rate applied to the particular security being issued.

The value of such security ratings has been widely questioned after the 2007/2009
financial crisis. In 2003 the U.S. Securities and Exchange Commission submitted a report
to Congress detailing plans to launch an investigation into the anti-competitive practices
of credit rating agencies and issues including conflicts of interest.[1]

A company that issues credit scores for individual credit-worthiness is generally called a
credit bureau (US) or consumer credit reporting agency (UK).

Contents
[hide]

• 1 Uses of ratings
o 1.1 Ratings use by bond issuers
o 1.2 Ratings use by government regulators
o 1.3 Ratings use in structured finance
• 2 Criticism
• 3 List of Credit Rating Agencies
• 4 The Big Three
• 5 CRA Business Models
• 6 See also
• 7 Further reading
• 8 References

• 9 External links

[edit] Uses of ratings

Credit ratings are used by investors, issuers, investment banks, broker-dealers, and
governments. For investors, credit rating agencies increase the range of investment
alternatives and provide independent, easy-to-use measurements of relative credit risk;
this generally increases the efficiency of the market, lowering costs for both borrowers
and lenders. This in turn increases the total supply of risk capital in the economy, leading
to stronger growth. It also opens the capital markets to categories of borrower who might
otherwise be shut out altogether: small governments, startup companies, hospitals, and
universities.

[edit] Ratings use by bond issuers

Issuers rely on credit ratings as an independent verification of their own credit-worthiness

and the resultant value of the instruments they issue. In most cases, a significant bond
issuance must have at least one rating from a respected CRA for the issuance to be
successful (without such a rating, the issuance may be undersubscribed or the price
offered by investors too low for the issuer's purposes). Studies by the Bond Market
Association note that many institutional investors now prefer that a debt issuance have at
least three ratings.

Issuers also use credit ratings in certain structured finance transactions. For example, a
company with a very high credit rating wishing to undertake a particularly risky research
project could create a legally separate entity with certain assets that would own and
conduct the research work. This "special purpose entity" would then assume all of the
research risk and issue its own debt securities to finance the research. The SPE's credit
rating likely would be very low, and the issuer would have to pay a high rate of return on
the bonds issued.

However, this risk would not lower the parent company's overall credit rating because the
SPE would be a legally separate entity. Conversely, a company with a low credit rating
might be able to borrow on better terms if it were to form an SPE and transfer significant
assets to that subsidiary and issue secured debt securities. That way, if the venture were
to fail, the lenders would have recourse to the assets owned by the SPE. This would lower
the interest rate the SPE would need to pay as part of the debt offering.

The same issuer also may have different credit ratings for different bonds. This difference
results from the bond's structure, how it is secured, and the degree to which the bond is
subordinated to other debt. Many larger CRAs offer "credit rating advisory services" that
essentially advise an issuer on how to structure its bond offerings and SPEs so as to
achieve a given credit rating for a certain debt tranche. This creates a potential conflict of
interest, of course, as the CRA may feel obligated to provide the issuer with that given
rating if the issuer followed its advice on structuring the offering. Some CRAs avoid this
conflict by refusing to rate debt offerings for which its advisory services were sought.

[edit] Ratings use by government regulators

Regulators use credit ratings as well, or permit ratings to be used for regulatory purposes.
For example, under the Basel II agreement of the Basel Committee on Banking
Supervision, banking regulators can allow banks to use credit ratings from certain
approved CRAs (called "ECAIs", or "External Credit Assessment Institutions") when
calculating their net capital reserve requirements. In the United States, the Securities and
Exchange Commission (SEC) permits investment banks and broker-dealers to use credit
ratings from "Nationally Recognized Statistical Rating Organizations" (or "NRSROs")
for similar purposes. The idea is that banks and other financial institutions should not
need keep in reserve the same amount of capital to protect the institution against (for
example) a run on the bank, if the financial institution is heavily invested in highly liquid
and very "safe" securities (such as U.S. government bonds or short-term commercial
paper from very stable companies).

CRA ratings are also used for other regulatory purposes as well. The US SEC, for
example, permits certain bond issuers to use a shortened prospectus form when issuing
bonds if the issuer is older, has issued bonds before, and has a credit rating above a
certain level. SEC regulations also require that money market funds (mutual funds that
mimic the safety and liquidity of a bank savings deposit, but without FDIC insurance)
comprise only securities with a very high NRSRO rating. Likewise, insurance regulators
use credit ratings to ascertain the strength of the reserves held by insurance companies.

In 2008, the Securities and Exchange Commission voted unanimously to propose

amendments to its rules that would remove credit ratings as one of the conditions for
companies seeking to use short-form registration when registering securities for public
sale.

This marks the first in a series of upcoming SEC proposals in accordance with Dodd-
Frank to remove references to credit ratings contained within existing Commission rules
and replace them with alternative criteria.

Under both Basel II and SEC regulations, not just any CRA's ratings can be used for
regulatory purposes. (If this were the case, it would present a moral hazard.[citation needed])
Rather, there is a vetting process of varying sorts. The Basel II guidelines (paragraph 91,
et al.), for example, describe certain criteria that bank regulators should look to when
permitting the ratings from a particular CRA to be used. These include "objectivity,"
"independence," "transparency," and others. Banking regulators from a number of
jurisdictions have since issued their own discussion papers on this subject, to further
define how these terms will be used in practice. (See The Committee of European
Banking Supervisors Discussion Paper, or the State Bank of Pakistan ECAI Criteria.)

In the United States, since 1975, NRSRO recognition has been granted through a "No
Action Letter" sent by the SEC staff. Following this approach, if a CRA (or investment
bank or broker-dealer) were interested in using the ratings from a particular CRA for
regulatory purposes, the SEC staff would research the market to determine whether
ratings from that particular CRA are widely used and considered "reliable and credible."
If the SEC staff determines that this is the case, it sends a letter to the CRA indicating
that if a regulated entity were to rely on the CRA's ratings, the SEC staff will not
recommend enforcement action against that entity. These "No Action" letters are made
public and can be relied upon by other regulated entities, not just the entity making the
original request. The SEC has since sought to further define the criteria it uses when
making this assessment, and in March 2005 published a proposed regulation to this
effect.
On September 29, 2006, US President George W. Bush signed into law the "Credit
Rating Reform Act of 2006".[2] This law requires the US Securities and Exchange
Commission to clarify how NRSRO recognition is granted, eliminates the "No Action
Letter" approach and makes NRSRO recognition a Commission (rather than SEC staff)
decision, and requires NRSROs to register with, and be regulated by, the SEC. S & P
protested the Act on the grounds that it is an unconstitutional violation of freedom of
speech.[2] In the Summer of 2007 the SEC issued regulations implementing the act,
requiring rating agencies to have policies to prevent misuse of nonpublic information,
disclosure of conflicts of interest and prohibitions against "unfair practices".[3]

Recognizing CRAs' role in capital formation, some governments have attempted to jump-
start their domestic rating-agency businesses with various kinds of regulatory relief or
encouragement. This may, however, be counterproductive, if it dulls the market
mechanism by which agencies compete, subsidizing less-capable agencies and penalizing
agencies that devote resources to higher-quality opinions.

[edit] Ratings use in structured finance

Credit rating agencies may also play a key role in structured financial transactions.
Unlike a "typical" loan or bond issuance, where a borrower offers to pay a certain return
on a loan, structured financial transactions may be viewed as either a series of loans with
different characteristics, or else a number of small loans of a similar type packaged
together into a series of "buckets" (with the "buckets" or different loans called
"tranches"). Credit ratings often determine the interest rate or price ascribed to a
particular tranche, based on the quality of loans or quality of assets contained within that
grouping.

Companies involved in structured financing arrangements often consult with credit rating
agencies to help them determine how to structure the individual tranches so that each
receives a desired credit rating. For example, a firm may wish to borrow a large sum of
money by issuing debt securities. However, the amount is so large that the return
investors may demand on a single issuance would be prohibitive. Instead, it decides to
issue three separate bonds, with three separate credit ratings—A (medium low risk), BBB
(medium risk), and BB (speculative) (using Standard & Poor's rating system).

The firm expects that the effective interest rate it pays on the A-rated bonds will be much
less than the rate it must pay on the BB-rated bonds, but that, overall, the amount it must
pay for the total capital it raises will be less than it would pay if the entire amount were
raised from a single bond offering. As this transaction is devised, the firm may consult
with a credit rating agency to see how it must structure each tranche—in other words,
what types of assets must be used to secure the debt in each tranche—in order for that
tranche to receive the desired rating when it is issued.

There has been criticism in the wake of large losses in the collateralized debt obligation
(CDO) market that occurred despite being assigned top ratings by the CRAs. For
instance, losses on $340.7 million worth of collateralized debt obligations (CDO) issued
by Credit Suisse Group added up to about $125 million, despite being rated AAA or Aaa
by Standard & Poor's, Moody's Investors Service and Fitch Group.[4]

The rating agencies respond that their advice constitutes only a "point in time" analysis,
that they make clear that they never promise or guarantee a certain rating to a tranche,
and that they also make clear that any change in circumstance regarding the risk factors
of a particular tranche will invalidate their analysis and result in a different credit rating.
In addition, some CRAs do not rate bond issuances upon which they have offered such
advice.

Complicating matters, particularly where structured finance transactions are concerned,

the rating agencies state that their ratings are opinions (and as such, are protected free
speech, granted to them by the "personhood" of corporations) regarding the likelihood
that a given debt security will fail to be serviced over a given period of time, and not an
opinion on the volatility of that security and certainly not the wisdom of investing in that
security. In the past, most highly rated (AAA or Aaa) debt securities were characterized
by low volatility and high liquidity—in other words, the price of a highly rated bond did
not fluctuate greatly day-to-day, and sellers of such securities could easily find buyers.

However, structured transactions that involve the bundling of hundreds or thousands of

similar (and similarly rated) securities tend to concentrate similar risk in such a way that
even a slight change on a chance of default can have an enormous effect on the price of
the bundled security. This means that even though a rating agency could be correct in its
opinion that the chance of default of a structured product is very low, even a slight
change in the market's perception of the risk of that product can have a disproportionate
effect on the product's market price, with the result that an ostensibly AAA or Aaa-rated
security can collapse in price even without there being any default (or significant chance
of default). This possibility raises significant regulatory issues because the use of ratings
in securities and banking regulation (as noted above) assumes that high ratings
correspond with low volatility and high liquidity.

[edit] Criticism
Credit rating agencies have been subject to the following criticisms:

• Credit rating agencies do not downgrade companies promptly enough. For

example, Enron's rating remained at investment grade four days before the
company went bankrupt, despite the fact that credit rating agencies had been
aware of the company's problems for months.[5][6] Some empirical studies have
documented that yield spreads of corporate bonds start to expand as credit quality
deteriorates but before a rating downgrade, implying that the market often leads a
downgrade and questioning the informational value of credit ratings.[7] This has
led to suggestions that, rather than rely on CRA ratings in financial regulation,
financial regulators should instead require banks, broker-dealers and insurance
firms (among others) to use credit spreads when calculating the risk in their
portfolio.
• Large corporate rating agencies have been criticized for having too familiar a
relationship with company management, possibly opening themselves to undue
influence or the vulnerability of being misled.[8] These agencies meet frequently in
person with the management of many companies, and advise on actions the
company should take to maintain a certain rating. Furthermore, because
information about ratings changes from the larger CRAs can spread so quickly
(by word of mouth, email, etc.), the larger CRAs charge debt issuers, rather than
investors, for their ratings. This has led to accusations that these CRAs are
plagued by conflicts of interest that might inhibit them from providing accurate
and honest ratings. At the same time, more generally, the largest agencies
(Moody's and Standard & Poor's) are often seen as promoting a narrow-minded
focus on credit ratings, possibly at the expense of employees, the environment, or
long-term research and development. These accusations are not entirely
consistent: on one hand, the larger CRAs are accused of being too cozy with the
companies they rate, and on the other hand they are accused of being too focused
on a company's "bottom line" and unwilling to listen to a company's explanations
for its actions.

• While often accused of being too close to company management of their existing
clients, CRAs have also been accused of engaging in heavy-handed "blackmail"
tactics in order to solicit business from new clients, and lowering ratings for those
firms . For instance, Moody's published an "unsolicited" rating of Hannover Re,
with a subsequent letter to the insurance firm indicating that "it looked forward to
the day Hannover would be willing to pay". When Hannover management
refused, Moody continued to give Hannover Re a rating, which were downgraded
over successive years, all while making payment requests that the insurer
rebuffed. In 2004, Moody's cut Hannover's debt to junk status, and even though
the insurer's other rating agencies gave it strong marks, shareholders were
shocked by the downgrade and Hannover lost $175 million USD in market
capitalization.[9]

• The lowering of a credit score by a CRA can create a vicious cycle, as not only
interest rates for that company would go up, but other contracts with financial
institutions may be affected adversely, causing an increase in expenses and
ensuing decrease in credit worthiness. In some cases, large loans to companies
contain a clause that makes the loan due in full if the companies' credit rating is
lowered beyond a certain point (usually a "speculative" or "junk bond" rating).
The purpose of these "ratings triggers" is to ensure that the bank is able to lay
claim to a weak company's assets before the company declares bankruptcy and a
receiver is appointed to divide up the claims against the company. The effect of
such ratings triggers, however, can be devastating: under a worst-case scenario,
once the company's debt is downgraded by a CRA, the company's loans become
due in full; since the troubled company likely is incapable of paying all of these
loans in full at once, it is forced into bankruptcy (a so-called "death spiral").
These rating triggers were instrumental in the collapse of Enron. Since that time,
major agencies have put extra effort into detecting these triggers and discouraging
 their use, and the U.S. Securities and Exchange Commission requires that public
companies in the United States disclose their existence.

• Agencies are sometimes accused of being oligopolists,[10] because barriers to

market entry are high and rating agency business is itself reputation-based (and
the finance industry pays little attention to a rating that is not widely recognized).
Of the large agencies, only Moody's is a separate, publicly held corporation that
discloses its financial results without dilution by non-ratings businesses, and its
high profit margins (which at times have been greater than 50 percent of gross
margin) can be construed as consistent with the type of returns one might expect
in an industry which has high barriers to entry.

• Credit Rating Agencies have made errors of judgment in rating structured

products, particularly in assigning AAA ratings to structured debt, which in a
large number of cases has subsequently been downgraded or defaulted. The actual
method by which Moody's rates CDOs has also come under scrutiny. If default
models are biased to include arbitrary default data and "Ratings Factors are biased
low compared to the true level of expected defaults, the Moody’s [method] will
not generate an appropriate level of average defaults in its default distribution
process. As a result, the perceived default probability of rated tranches from a
high yield CDO will be incorrectly biased downward, providing a false sense of
confidence to rating agencies and investors.".[11] Little has been done by rating
agencies to address these shortcomings indicating a lack of incentive for quality
ratings of credit in the modern CRA industry. This has led to problems for several
banks whose capital requirements depend on the rating of the structured assets
they hold, as well as large losses in the banking industry.[12][13][14] AAA rated
mortgage securities trading at only 80 cents on the dollar, implying a greater than
20% chance of default, and 8.9% of AAA rated structured CDOs are being
considered for downgrade by Fitch, which expects most to downgrade to an
average of BBB to BB-. These levels of reassessment are surprising for AAA
rated bonds, which have the same rating class as US government bonds.[15][16]
Most rating agencies do not draw a distinction between AAA on structured
finance and AAA on corporate or government bonds (though their ratings releases
typically describe the type of security being rated). Many banks, such as AIG,
made the mistake of not holding enough capital in reserve in the event of
downgrades to their CDO portfolio. The structure of the Basel II agreements
meant that CDOs capital requirement rose 'exponentially'. This made CDO
portfolios vulnerable to multiple downgrades, essentially precipitating a large
margin call. For example under Basel II, a AAA rated securitization requires
capital allocation of only 0.6%, a BBB requires 4.8%, a BB requires 34%, whilst
a BB(-) securitization requires a 52% allocation. For a number of reasons
(frequently having to do with inadequate staff expertise and the costs that risk
management programs entail), many institutional investors relied solely on the
ratings agencies rather than conducting their own analysis of the risks these
instruments posed. (As an example of the complexity involved in analyzing some
CDOs, the Aquarius CDO structure has 51 issues behind the cash CDO
 component of the structure and another 129 issues that serve as reference entities
for $1.4 billion in CDS contracts for a total of 180. In a sample of just 40 of these,
they had on average 6500 loans at origination. Projecting that number to all 180
issues implies that the Aquarius CDO has exposure to about 1.2 million loans.)
Pimco founder William Gross urged investors to ignore rating agency judgments,
describing the agencies as "an idiot savant with a full command of the
mathematics, but no idea of how to apply them."[17]

• Ratings agencies, in particular Fitch, Moody's and Standard and Poors have been
implicitly allowed by governments to fill a quasi-regulatory role, but because they
are for-profit entities their incentives may be misaligned. Conflicts of interest
often arise because the rating agencies, are paid by the companies issuing the
securities — an arrangement that has come under fire as a disincentive for the
agencies to be vigilant on behalf of investors. Many market participants no longer
rely on the credit agencies ratings systems, even before the economic crisis of
2007-8, preferring instead to use credit spreads to benchmarks like Treasuries or
an index. However, since the Federal Reserve requires that structured financial
entities be rated by at least two of the three credit agencies, they have a continued
obligation.

• Many of the structured financial products that they were responsible for rating,
consisted of lower quality 'BBB' rated loans, but were, when pooled together into
CDOs, assigned an AAA rating. The strength of the CDO was not wholly
dependent on the strength of the underlying loans, but in fact the structure
assigned to the CDO in question. CDOs are usually paid out in a 'waterfall' style
fashion, where income received gets paid out first to the highest tranches, with the
remaining income flowing down to the lower quality tranches i.e. <AAA. CDOs
were typically structured such that AAA tranches which were to receive first lien
(claim) on the BBB rated loans cash flows, and losses would trickle up from the
lowest quality tranches first. Cash flow was well insulated even against heavy
levels of home owner defaults. Credit rating agencies only accounted for a ~5%
decline in national housing prices at worst, allowing for a confidence in rating the
many of these CDOs that had poor underlying loan qualities as AAA. It did not
help that an incestuous relationship between financial institutions and the credit
agencies developed such that, banks began to leverage the credit ratings off one
another and 'shop' around amongst the three big credit agencies until they found
the best ratings for their CDOs. Often they would add and remove loans of
various quality until they met the minimum standards for a desired rating, usually,
AAA rating. Often the fees on such ratings were $300,000 - $500,000, but ran up
to $1 million.[18]

• It has also been suggested that the credit agencies are conflicted in assigning
sovereign credit ratings since they have a political incentive to show they do not
need stricter regulation by being overly critical in their assessment of
governments they regulate.[19]
As part of the Sarbanes-Oxley Act of 2002, Congress ordered the U.S. SEC to develop a
report, titled Report on the Role and Function of Credit Rating Agencies in the Operation
of the Securities Markets detailing how credit ratings are used in U.S. regulation and the
policy issues this use raises. Partly as a result of this report, in June 2003, the SEC
published a "concept release" called Rating Agencies and the Use of Credit Ratings under
the Federal Securities Laws that sought public comment on many of the issues raised in
its report. Public comments on this concept release have also been published on the SEC's
website.

In December 2004, the International Organization of Securities Commissions (IOSCO)

published a Code of Conduct for CRAs that, among other things, is designed to address
the types of conflicts of interest that CRAs face. All of the major CRAs have agreed to
sign on to this Code of Conduct and it has been praised by regulators ranging from the
European Commission to the U.S. Securities and Exchange Commission.

[edit] List of Credit Rating Agencies

For more information, see Bond credit rating.

Agencies that assign credit ratings for corporations include:

• A. M. Best (U.S.)
• Baycorp Advantage (Australia)
• Dagong Global (Peoples Republic of China)
• Dominion Bond Rating Service (Canada)
• Fitch Ratings (Dual-headquartered U.S./UK)
• Moody's Investors Service (U.S.)
• Muros Ratings(Russia alternative rating agency)
• Standard & Poor's (U.S.)
• Egan-Jones Rating Company (U.S.)
• Japan Credit Rating Agency, Ltd. (Japan)[20]

There are no notable European CRAs.

[edit] The Big Three

Main article: Big Three (credit rating agencies)

The Big Three credit rating agencies are Standard & Poor's, Moody's Investor Service
and Fitch Ratings.[21] Moody's and S&P each control about 40 percent of the market.
Third-ranked Fitch Ratings, which has about a 14 percent market share, sometimes is
used as an alternative to one of the other majors.[22]

[edit] CRA Business Models

Most credit rating agencies follow one of two business models. Originally, all CRAs
relied on a "subscriber-based" business model where the CRA would not distribute the
ratings for free but would instead only provide the ratings to subscribers to the CRA's
publications. Subscription fees would provide the bulk of the CRA's income. Today, most
smaller CRAs still rely on this business model, which proponents believe allows the CRA
to publish ratings that are less likely to be tinged by certain types of conflicts of interest.
By contrast, most large and medium-sized CRAs (including Moody's, S&P, Fitch, Japan
Credit Ratings, R&I, A.M. Best and others) today rely on an "issuer-pays" business
model in which most of the CRA's revenue comes from fees paid by the issuers
themselves. Under this business model, while subscribers to the CRA's services are still
provided with more detailed reports analyzing an issuer, these services are a minor source
of income and most ratings are provided to the public for free. Proponents of this model
argue that if the CRA relied only on subscriptions for income, the vast majority of bonds
would go unrated since subscriber interest is low for all but the largest issuances. These
proponents also argue that while they face a clear conflict of interest vis-a-vis the issuers
they rate (as described above), the subscriber-based model also presents conflicts of
interest, since a single subscriber may provide a large portion of a CRA's revenue and the
CRA may feel obligated to publish ratings that support that subscriber's investment
decisions.
Before you decide whether to invest into a debt security from a company or foreign
country, you must determine whether the prospective entity will be able to meet its
obligations. A ratings company can help you do this. Providing independent objective
assessments of the credit worthiness of companies and countries, a credit ratings
company helps investors decide how risky it is to invest money in a certain country
and/or security.

<script language="JavaScript" type="text/javascript"> document.write('<a

href="http://ops.investopedia.com/RealMedia/ads/click_lx.ads/investopedia.com/bonds/L
22/281007247/x20/Investo/IPFXC1102_10_250x250_AF_OPT/IPFXC1102_10_250x25
0_AF_OPT_2011-02-01.html/4f3139693445326861635941416c6856?
http://clk.atdmt.com/FXM/go/169829036/direct;wi.250;hi.250/01/281007247"
target="_blank"><img
src="http://view.atdmt.com/FXM/view/169829036/direct;wi.250;hi.250/01/281007247"/
></a>'); </script><noscript><a
href="http://ops.investopedia.com/RealMedia/ads/click_lx.ads/investopedia.com/bonds/L
22/281007247/x20/Investo/IPFXC1102_10_250x250_AF_OPT/IPFXC1102_10_250x25
0_AF_OPT_2011-02-01.html/4f3139693445326861635941416c6856?
http://clk.atdmt.com/FXM/go/169829036/direct;wi.250;hi.250/01/281007247"
target="_blank"><img border="0"
src="http://view.atdmt.com/FXM/view/169829036/direct;wi.250;hi.250/01/281007247" /
></a></noscript>
Credit in the Investment World
As investment opportunities become more global and diverse, it is difficult to decide not
only which companies but also which countries are good investment opportunities. There
are advantages to investing in foreign markets, but the risks associated with sending
money abroad are considerably higher than those associated with investing in your own
domestic market. (For more insight, see Pros And Cons Of Offshore Investing.)It is
important to gain insight into different investment environments but also to understand
the risks and advantages these environments pose. Measuring the ability and willingness
of an entity - which could be a person, a corporation, a security or a country - to keep its
financial commitments or its debt, credit ratings are essential tools for helping you make
some investment decisions.

The Raters
There are three top agencies that deal in credit ratings for the investment world. These
are: Moody's, Standard and Poor's (S&P's) and Fitch IBCA. Each of these agencies aim
to provide a rating system to help investors determine the risk associated with investing
in a specific company, investing instrument or market.

Ratings can be assigned to short-term and long-term debt obligations as well as securities,
loans, preferred stock and insurance companies. Long-term credit ratings tend to be more
indicative of a country's investment surroundings and/or a company's ability to honor its
debt responsibilities.

For a government or company it is sometimes easier to pay back local-currency

obligations than it is to pay foreign-currency obligations. The ratings therefore assess an
entity's ability to pay debts in both foreign and local currencies. A lack of foreign
reserves, for example, may warrant a lower rating for those obligations a country made in
foreign currency.

It is important to note that ratings are not equal to or the same as buy, sell or hold
recommendations. Ratings are rather a measure of an entity's ability and willingness to
repay debt.

The Ratings Are In

The ratings lie on a spectrum ranging between highest credit quality on one end and
default or "junk" on the other. Long–term credit ratings are denoted with a letter: a triple
A (AAA) is the highest credit quality, and C or D (depending on the agency issuing the
rating) is the lowest or junk quality. Within this spectrum there are different degrees of
each rating, which are, depending on the agency, sometimes denoted by a plus or
negative sign or a number.

Thus, for Fitch IBCA, a "AAA" rating signifies the highest investment grade and means
that there is very low credit risk. "AA" represents very high credit quality; "A" means
high credit quality, and "BBB" is good credit quality. These ratings are considered to be
investment grade, which means that the security or the entity being rated carries a level of
quality that many institutions require when considering overseas investments.

Ratings that fall under "BBB" are considered to be speculative or junk. Thus for Moody's
a Ba2 would be a speculative grade rating while for S&P's, a "D" denotes default of junk
bond status.

Here is a chart that gives an overview of the different ratings symbols that Moody's and
Standard and Poor's issue:

Bond Rating
Standard & Grade Risk
Moody's
Poor's
Aaa AAA Investment Lowest Risk
Aa AA Investment Low Risk
A A Investment Low Risk
Baa BBB Investment Medium Risk
Ba, B BB, B Junk High Risk
Caa/Ca/C CCC/CC/C Junk Highest Risk
C D Junk In Default
Sovereign Credit Ratings
As previously mentioned, a rating can refer to an entity's specific financial obligation or
to its general creditworthiness. A sovereign credit rating provides the latter as it signifies
a country's overall ability to provide a secure investment environment. This rating reflects
factors such as a country's economic status, transparency in the capital market, levels of
public and private investment flows, foreign direct investment, foreign currency reserves,
political stability, or the ability for a country's economy to remain stable despite political
change.

Because it is the doorway into a country's investment atmosphere, the sovereign rating is
the first thing most institutional investors will look at when making a decision to invest
money abroad. This rating gives the investor an immediate understanding of the level of
risk associated with investing in the country. A country with a sovereign rating will
therefore get more attention than one without. So to attract foreign money, most countries
will strive to obtain a sovereign rating and they will strive even more so to reach
investment grade. In most circumstances, a country's sovereign credit rating will be its
upper limit of credit ratings.

Conclusion
A credit rating is a useful tool not only for the investor, but also for the entities looking
for investors. An investment grade rating can put a security, company or country on the
global radar, attracting foreign money and boosting a nation's economy. Indeed, for
emerging market economies, the credit rating is key to showing their worthiness of
money from foreign investors. (To read more, see What Is An Emerging Market
Economy?) And because the credit rating acts to facilitate investments, many countries
and companies will strive to maintain and improve their ratings, hence ensuring a stable
political environment and a more transparent capital market.

by Reem Heakal (Contact Author | Biography)

Filed Under: Bonds, Credit, Fixed Income, Insurance

4 Proven Strategies for Improving Your

Business Credit Score
Improving your business credit score can provide a number of benefits to your business
in the long run. You will be able to save money on interest and be approved more easily
for financing when you need it. Here are a few proven strategies for improving your
business credit score.
1. Pay down Balances

One of the best ways to lower your business credit score is to pay down outstanding
balances on your accounts. One of the major criteria that the credit bureaus use to
determine your credit score is the amount of money that you have on your accounts. If a
large percentage of your available credit is used up, this is going to negatively affect your
credit score. By paying down the balances, you will free up more of your credit lines
which reflects positively on you as a business. It shows the credit bureaus that you can
have credit lines open without using them, which demonstrates restraint on your part.
Make every effort that you can to apply extra cash to paying off balances early.

2. Make On-Time Payments

Another strategy that you can use to significantly improve your business credit score is to
make your payments on time. Many people do not realize the impact that making
payments has to your credit score. However, this might be the most important factor
when it comes to determining your score. Every month your creditors are going to report
your payment to the credit bureaus. If you are late on your payment, they will report it as
such to the bureaus. If you are continuously late, this is going to seriously negatively
impact your score overall.

3. Increase Credit Limits

Something else that you can do to help move up your score is increasing your credit
limits. Call all of your credit card companies and other accounts to see if they are willing
to bump up your credit line. When you do this, this is going to increase the amount of
available credit that you have open. This will work in tandem with paying down the
balances on your cards to create as much open credit as possible. The more open credit
that you have on your file, the more your credit score is going to increase with the
bureaus.

4. Closing Accounts

Many people feel that they should immediately close out an account after they have paid
it off. However, this is not necessarily always in your best interest. If you have a good
payment history with a particular company, you may want to leave the account open even
if you do not have any balances on it. Credit bureaus look at how long you have had
accounts open when determining your credit score. If you can hang onto the card that you
have had the longest, it will increase the amount of time that you have been a creditor.
This will work to better your credit score overall and improve your chances of getting
credit in the future.

1. & Improve Credit

2. » Bad Credit Rating
 3. » Credit Rating Strategies

Top 5 To Try

• How to Fix Credit Reports Fast

• The Best Credit Repair
• Strategies for a Credit Card
• How to Boost a Credit Rating Fast
• How to Talk to Credit Card Companies to Reduce Interest Rates

Frances Burks
Frances Burks is a media and communications industry professional with 15 years'
experience in staff and freelance positions, which includes work as a news analyst, writer,
editor, assistant news director and member services representative for organizations such
as The Associated Press. Burks's articles have been published by USA Today and other
newspapers. Burks has a bachelor's degree in political science from the University of
Michigan.
By Frances Burks, eHow Contributor

updated: January 11, 2011

You can't quickly remove accurate, negative information in your credit files, but you can
work on a strategy to improve your credit rating. Credit-scoring models that determine a
consumer's credit rating vary, but maintaining a low amount of credit-card debt and a
good payment history can bolster your rating in any case.

Credit-Card Debt
o Paying down a mortgage, auto loan or student loan will help decrease your
overall debt load, but reducing credit-card debt will likely do more to
increase your credit rating. Lenders tend to pay close attention to whether
loan applicants are maxing out their credit-card limits. Applications are
usually viewed more favorably if potential borrowers have low credit-card
balances. Some financial professionals recommend using less than 30
percent of a credit limit. Therefore, you could increase your credit score
by paying down credit cards that are close to their limits.

Closing Accounts
o Some people assume they will bolster their credit rating by reducing the
number of accounts they have. So they close old or unused credit accounts
to increase their credit scores. This strategy can have the opposite effect
because your credit score is impacted by the length of your credit history.
The longer you've maintained credit accounts in good standing, the higher
your credit score will be. Closing older accounts while leaving newer ones
open could hamper your overall credit rating.
 Payments
o According to the Experian credit-reporting company, paying your bills on
time is the most important thing you can do to maintain a good credit
rating. Late payments documented on your credit report will hinder your
credit score even if you don't owe a large amount of debt. Consider
signing up for your creditors' automatic-payment services if you need help
organizing your debts to get them paid on time. Many creditors allow their
customers to have their payments automatically drawn out of their
checking or savings accounts at a specified time each month.

Credit Errors
o Your credit rating is based on what's in your credit files. Therefore, it's
important to check your credit reports at the three nationwide credit-
reporting agencies to ensure the information in them is accurate. For
example, if you have higher credit limits on your accounts than your
reports say you do, it could appear you're maxing out your available
credit. Federal law allows consumers to request a free credit report one
time per year from the following credit-reporting companies: Equifax,
Experian and TransUnion.

1. & Improve Credit

2. » Bad Credit Rating
3. » Credit Rating Strategies

Top 5 To Try

• How to Fix Credit Reports Fast

• The Best Credit Repair
• Strategies for a Credit Card
• How to Boost a Credit Rating Fast
• How to Talk to Credit Card Companies to Reduce Interest Rates
Ads by Google

• Fundraising Widgets

+ Free Donor Management With 30+ tools from ClickandPledge

www.ClickandPledge.com/salesforce

• Lowest Rate Personal Loan

Instant Personal loans upto 10 Lakh Online Rates,Emi-Instant Approvals

www.fullertonindialoans.com

• Personal Loan in 2 Mins

Compare SBI,Hdfc,IClCI,Fullerton ClTl,Choose Lowest Emi,Rates,etc

PersonalLoans.Deal4Loans.com

• RMSS - Risk Management

Enterprise Risk Intelligence Risk / Events / Compliance

www.rmss.com.au

• Patent Annuity Payment

Worldwide Annuity Payment fast and simple by credit card

www.ip-pay.com

Credit Rating Strategies

X

Frances Burks
Frances Burks is a media and communications industry professional with 15 years'
experience in staff and freelance positions, which includes work as a news analyst, writer,
editor, assistant news director and member services representative for organizations such
as The Associated Press. Burks's articles have been published by USA Today and other
newspapers. Burks has a bachelor's degree in political science from the University of
Michigan.
By Frances Burks, eHow Contributor
updated: January 11, 2011

You can't quickly remove accurate, negative information in your credit files, but you can
work on a strategy to improve your credit rating. Credit-scoring models that determine a
consumer's credit rating vary, but maintaining a low amount of credit-card debt and a
good payment history can bolster your rating in any case.

Credit-Card Debt
o Paying down a mortgage, auto loan or student loan will help decrease your
overall debt load, but reducing credit-card debt will likely do more to
increase your credit rating. Lenders tend to pay close attention to whether
loan applicants are maxing out their credit-card limits. Applications are
usually viewed more favorably if potential borrowers have low credit-card
balances. Some financial professionals recommend using less than 30
percent of a credit limit. Therefore, you could increase your credit score
by paying down credit cards that are close to their limits.

Closing Accounts
o Some people assume they will bolster their credit rating by reducing the
number of accounts they have. So they close old or unused credit accounts
to increase their credit scores. This strategy can have the opposite effect
because your credit score is impacted by the length of your credit history.
The longer you've maintained credit accounts in good standing, the higher
your credit score will be. Closing older accounts while leaving newer ones
open could hamper your overall credit rating.

Payments
o According to the Experian credit-reporting company, paying your bills on
time is the most important thing you can do to maintain a good credit
rating. Late payments documented on your credit report will hinder your
credit score even if you don't owe a large amount of debt. Consider
signing up for your creditors' automatic-payment services if you need help
organizing your debts to get them paid on time. Many creditors allow their
customers to have their payments automatically drawn out of their
checking or savings accounts at a specified time each month.

Credit Errors
o Your credit rating is based on what's in your credit files. Therefore, it's
important to check your credit reports at the three nationwide credit-
reporting agencies to ensure the information in them is accurate. For
example, if you have higher credit limits on your accounts than your
 reports say you do, it could appear you're maxing out your available
credit. Federal law allows consumers to request a free credit report one
time per year from the following credit-reporting companies: Equifax,
Experian and TransUnion.

• Secrets of Rural Brandingwww.PlaceBrand.ca

Download our free 10 step chart 2 develop a rural branding strategy

• HDFC Bank Credit CardsHDFCBankcreditcards.co.in

Avail Exclusive Benefits with HDFC Bank Platinum Plus Credit Card.

• Global Credit Reportswww.premier-collect.com

Complete Financial Analysis Private & Confidential Reporting

• 2 Days Free Trialswww.capitalvia.com

Get Call & Put Tips on your Mobile Feel the Excellence of Calls.

Ads by Google

References
• Bankrate: Tips for Boosting Your Credit Score
• MSN Money: 7 Fast Fixes for Your Credit Scores
• U.S. Federal Reserve Board: Improving Your Credit Score
• Experian: Improve Your Credit Score

Resources
• Federal Trade Commission: Your Access to Free Credit Reports

• Print
• Email
• Share

Read Next Article

Comments
• Print
• Email
• Share
 Related Ads

• Credit Improve
• Credit Repair
• Reading Strategies
• ESL Strategies
• Fixing Credit
• Credit Fix

Related Articles & Videos

• How to Fix Credit Reports Fast

• The Best Credit Repair

• Strategies for a Credit Card

• How to Boost a Credit Rating Fast

• How to Talk to Credit Card Companies to Reduce Interest Rates

• How Does Paying Off a Credit Card in Full, Each Month Affect a
Credit Rating?
More
Helpful?
Yes
No

• Thanks for helping us to

make eHow better for everyone.
• Why Not? Too general / no useful information Information is out of date
Information is inaccurate Article needs more photos Article is
offensive Wasn't what I was looking for

Read more: Credit Rating Strategies | eHow.com

http://www.ehow.com/info_7759659_credit-rating-strategies.html#ixzz1J6iTaBUp

1. & Improve Credit

2. » Bad Credit Rating
3. » Credit Rating Strategies

Top 5 To Try

• How to Fix Credit Reports Fast

• The Best Credit Repair
• Strategies for a Credit Card
• How to Boost a Credit Rating Fast
• How to Talk to Credit Card Companies to Reduce Interest Rates

Ads by Google

• Fundraising Widgets

+ Free Donor Management With 30+ tools from ClickandPledge

www.ClickandPledge.com/salesforce

• Lowest Rate Personal Loan

Instant Personal loans upto 10 Lakh Online Rates,Emi-Instant Approvals

www.fullertonindialoans.com

• Personal Loan in 2 Mins

Compare SBI,Hdfc,IClCI,Fullerton ClTl,Choose Lowest Emi,Rates,etc

 PersonalLoans.Deal4Loans.com

• RMSS - Risk Management

Enterprise Risk Intelligence Risk / Events / Compliance

www.rmss.com.au

• Patent Annuity Payment

Worldwide Annuity Payment fast and simple by credit card

www.ip-pay.com

Credit Rating Strategies

X

Frances Burks
Frances Burks is a media and communications industry professional with 15 years'
experience in staff and freelance positions, which includes work as a news analyst, writer,
editor, assistant news director and member services representative for organizations such
as The Associated Press. Burks's articles have been published by USA Today and other
newspapers. Burks has a bachelor's degree in political science from the University of
Michigan.
By Frances Burks, eHow Contributor

updated: January 11, 2011

You can't quickly remove accurate, negative information in your credit files, but you can
work on a strategy to improve your credit rating. Credit-scoring models that determine a
consumer's credit rating vary, but maintaining a low amount of credit-card debt and a
good payment history can bolster your rating in any case.

Credit-Card Debt
o Paying down a mortgage, auto loan or student loan will help decrease your
overall debt load, but reducing credit-card debt will likely do more to
increase your credit rating. Lenders tend to pay close attention to whether
loan applicants are maxing out their credit-card limits. Applications are
usually viewed more favorably if potential borrowers have low credit-card
balances. Some financial professionals recommend using less than 30
percent of a credit limit. Therefore, you could increase your credit score
by paying down credit cards that are close to their limits.
Closing Accounts
o Some people assume they will bolster their credit rating by reducing the
number of accounts they have. So they close old or unused credit accounts
to increase their credit scores. This strategy can have the opposite effect
because your credit score is impacted by the length of your credit history.
The longer you've maintained credit accounts in good standing, the higher
your credit score will be. Closing older accounts while leaving newer ones
open could hamper your overall credit rating.

Payments
o According to the Experian credit-reporting company, paying your bills on
time is the most important thing you can do to maintain a good credit
rating. Late payments documented on your credit report will hinder your
credit score even if you don't owe a large amount of debt. Consider
signing up for your creditors' automatic-payment services if you need help
organizing your debts to get them paid on time. Many creditors allow their
customers to have their payments automatically drawn out of their
checking or savings accounts at a specified time each month.

Credit Errors
o Your credit rating is based on what's in your credit files. Therefore, it's
important to check your credit reports at the three nationwide credit-
reporting agencies to ensure the information in them is accurate. For
example, if you have higher credit limits on your accounts than your
reports say you do, it could appear you're maxing out your available
credit. Federal law allows consumers to request a free credit report one
time per year from the following credit-reporting companies: Equifax,
Experian and TransUnion.