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What Is a Credit Rating?

A credit rating is an evaluation by a rating agency of an issuer's — such as a country's or a company's — ability to repay its debt (principal and interest), expressed using a symbol-based scale.

How to read a rating

Rating agencies such as S&P, Moody's, and other credit rating organizations evaluate creditworthiness in stages using symbols such as AAA, AA, A, and BBB. Generally, a rating of BBB (triple-B) or higher is classified as "investment grade," while anything below that is classified as "speculative grade."

What to keep in mind

Investors tend to demand a higher yield for a lower-rated bond, which is why lower-rated bonds generally carry higher yields. That said, this higher yield is also the flip side of higher credit risk, and keep in mind that a rating does not guarantee that principal and interest will actually be repaid in the future.

This article is provided for general informational purposes only and does not recommend or solicit the purchase or sale of any specific investment method or security. Final investment decisions are your own responsibility.

Frequently Asked Questions

Does a high credit rating mean an investment is safe?
A credit rating is a rating agency's opinion on the issuer's ability to repay principal and interest, and it does not guarantee the safety of an investment. Even a highly rated issuer can see its creditworthiness deteriorate due to changes in economic conditions or other factors.
What happens when a rating is lowered (a downgrade)?
A downgrade is generally taken as a signal of deteriorating creditworthiness, and it can be associated with a decline in the price of the affected bond or a rise in the funding rate for new issuance. That said, the extent of the impact varies case by case.

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