What is a Credit Rating?

A credit rating is a standard score assigned to an entity or its securities by a credit rating agency, based on a review of its financial condition. This review is derived from financial and operational information provided by the business, as well as information obtained from other sources.

The credit rating agencies all have different scoring systems, but the highest score generally given is AAA, and the lowest score is either C or D. If a credit rating is sufficiently high, investors will likely accept a lower effective interest rate on any debt issued by an entity, on the grounds that there is a low risk of default. Conversely, an entity given a low score may not be able to secure any debt financing at all.