Glossary · Bonds and rates
Credit rating
A credit rating is a grade, like AAA or BB, that an agency gives a borrower or a bond to say how likely it is to pay its debts on time.
Also called: bond rating, credit grade, AAA rating, sovereign rating
In plain words
Before lending to a friend, you think about whether they paid you back last time. Lenders do the same with governments and companies, on a huge scale, so they rely on specialists. A credit rating is the specialist’s verdict, written as a letter grade.
The best-known raters are S&P Global, Moody’s and Fitch. Their scales run from AAA (S&P, Fitch) or Aaa (Moody’s), the safest, down through AA, A and BBB, then BB, B and CCC, to the lowest grades for borrowers in or near default: D at S&P and Fitch, C at Moody’s. Pluses, minuses or numbers split each step.
The grade matters because it sets the price of borrowing: the lower it is, the more interest investors demand. The line between BBB and BB is the big one: above it, bonds are investment grade; below it, junk.
Example
What a downgrade costs a company
- A company rated A sells 10-year bonds at a yield 1 point above Treasuries.
- Its profits fall and its debt piles up; the agency cuts it to BBB, then to BB.
- At BB it is no longer investment grade. Many pension and insurance funds are not allowed to hold it, so they sell, and its bonds’ price drops.
- Its next bonds must offer, say, 3 points above Treasuries: on $500 million borrowed, that is $10 million more interest a year.
That is why companies fight hard to keep a BBB grade.
One level deeper
Agencies look at how much a borrower owes against what it earns, how steady its income is, what it owns and how it has paid in the past. For governments they add the economy, the budget and how decisions get made. A country borrowing in its own currency can always create money to pay, so it rarely defaults on that debt, though inflation may eat its value.
The borrower pays for its own rating, which critics call a conflict of interest. Before the 2008 crisis the agencies gave AAA grades to many bonds backed by subprime mortgages that later collapsed, which badly hurt their reputation.
Ratings change slowly and markets often move first: a bond’s credit spread can widen months before a downgrade. Very few borrowers keep a AAA grade. The US government lost it at S&P in 2011, at Fitch in 2023 and at Moody’s in 2025.
Why it matters
Ratings set borrowing costs: a cut can add millions of dollars a year in interest for a company, and far more for a country.
Many funds may only buy investment-grade bonds, so a downgrade to junk can force them all to sell at once.
For savers, the rating is a quick first check of how risky a bond is, though not a guarantee.
A common mistake
Myth: A AAA rating means a bond is risk-free.
In fact: It means the agency sees default as very unlikely, not impossible, and it says nothing about price swings when interest rates move. In 2007 and 2008 many AAA-rated mortgage bonds lost much of their value.
Questions people ask
Who gives credit ratings?
Mostly three private agencies: S&P Global Ratings, Moody’s and Fitch. In the US they are registered with the Securities and Exchange Commission, and borrowers pay them to be rated.
What is the US government’s credit rating?
It lost the top grade, AAA, at S&P in 2011, at Fitch in 2023 and at Moody’s in 2025. Each moved it one step down, to AA+ (S&P, Fitch) or Aa1 (Moody’s).
Is a credit rating the same as a credit score?
No. A credit rating grades a company’s or a government’s debt; a credit score is a number, in the US usually from 300 to 850, that grades a person as a borrower.
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About the numbers
- This page explains a term. It is not investment advice.