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The credit worthiness of an individual, business or nation are assessed using credit ratings. The credit rating is used by the lender or investor to assess the risk of lending or investing money to the individual or the business. A poor credit rating indicate that the borrower is more likely to default on loan payments. Credit ratings are usually calculated using the financial history of the person and also current assets and liabilities. Nowadays, they are also used by companies before selecting employees and for calculating insurance premia.
In most countries, the financial records of an individual are available with different unrelated organizations and it is difficult to arrive at a credit rating for the individual. However, in developed countries like USA, Canada and parts of Europe, the credit history of an individual is compiled and maintained by credit bureaus. After statistical analysis of the credit history, an individual is assigned a three digit credit score.
The lower the credit score, the more difficult it is for the individual to borrow money and the interest rates are likely to be higher. A short term rating indicates the probability of a loan default within a year, while the long term rating is an indication of the financial stability over a period of a few years. In USA and Canada, Experian, Equifax, Transunion and Innovis are the major credit rating agencies for individuals.
Many corporations raise money by issuing bonds and other debt instruments. The credit rating of these companies is a measure of their ability to pay the lenders interest and principal on time. Standard & Poor is one of worldwide credit rating agencies, while rates corporate debit using letter designations like AAA, BB, C , etc. Sovereign credit rating is the risk of investing in foreign countries and considers both economic stability and political climate of the country.
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