credit rating companies

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A credit rating agency (CRA) is a company that assigns credit ratingsforissuers ofcertain types ofdebt obligations as well as the debt instruments themselves. In somecases, the servicers of the underlying debt are also given ratings.

In most cases, the issuers ofsecuritiesare companies, special purpose entities, state and

local governments, non-profit organizations, or national governments issuing debt-likesecurities (i.e.,bonds) that can be traded on a secondary market. A credit rating for anissuer takes into consideration the issuer'scredit worthiness (i.e., its ability to pay back aloan), and affects theinterest rate applied to the particular security being issued.

The value of such security ratings has been widely questioned after the 2007/2009financial crisis. In 2003 the U.S. Securities and Exchange Commission submitted a reportto Congress detailing plans to launch an investigation into the anti-competitive practicesof 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) orconsumer credit reporting agency(UK).

Contents

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1 Uses of ratingso 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, andgovernments. For investors, credit rating agencies increase the range of investmentalternatives and provide independent, easy-to-use measurements of relative credit risk;this generally increases the efficiency of the market, lowering costs for bothborrowersandlenders. This in turn increases the total supply ofrisk capital in the economy, leading
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to stronger growth. It also opens the capital markets to categories of borrower who mightotherwise be shut out altogether: small governments, startup companies, hospitals, anduniversities.

[edit] Ratings use by bond issuers

Issuers rely on credit ratings as an independent verification of their own credit-worthinessand the resultant value of the instruments they issue. In most cases, a significant bondissuance must have at least one rating from a respected CRA for the issuance to besuccessful (without such a rating, the issuance may be undersubscribed or the priceoffered by investors too low for the issuer's purposes). Studies by theBond MarketAssociation note that many institutional investors now prefer that a debt issuance have atleast three ratings.

Issuers also use credit ratings in certainstructured finance transactions. For example, acompany 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 andconduct the research work. This "special purpose entity" would then assume all of theresearch risk and issue its own debt securities to finance the research. The SPE's creditrating likely would be very low, and the issuer would have to pay a high rate of return onthe bonds issued.

However, this risk would not lower theparent company's overall credit rating because theSPE would be a legally separate entity. Conversely, a company with a low credit ratingmight be able to borrow on better terms if it were to form an SPE and transfer significantassets to that subsidiary and issue secured debtsecurities. That way, if the venture wereto 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 differenceresults from the bond's structure, how it issecured, and the degree to which the bond issubordinated to other debt. Many larger CRAs offer "credit rating advisory services" thatessentially advise an issuer on how to structure its bond offerings and SPEs so as toachieve a given credit rating for a certain debttranche. This creates a potential conflict ofinterest, of course, as the CRA may feel obligated to provide the issuer with that givenrating if the issuer followed its advice on structuring the offering. Some CRAs avoid thisconflict 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 theBasel Committee on BankingSupervision, banking regulators can allow banks to use credit ratings from certainapproved CRAs (called "ECAIs", or "External Credit Assessment Institutions") whencalculating their net capital reserve requirements. In the United States, the Securities andExchange Commission (SEC) permits investment banks and broker-dealers to use credit
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ratings from "Nationally Recognized Statistical Rating Organizations" (or "NRSROs")for similar purposes. The idea is that banks and other financial institutions should notneed keep in reserve the same amount ofcapital to protect the institution against (forexample) a run on the bank, if the financial institution is heavily invested in highly liquidand very "safe" securities (such as U.S.government bonds or short-term commercial

paperfrom very stable companies).

CRA ratings are also used for other regulatory purposes as well. The US SEC, forexample, permits certain bond issuers to use a shortenedprospectus form when issuingbonds if the issuer is older, has issued bonds before, and has a credit rating above acertain level. SEC regulations also require thatmoney market funds (mutual fundsthatmimic the safety and liquidity of a banksavings deposit, but without FDIC insurance)comprise only securities with a very high NRSRO rating. Likewise, insurance regulatorsuse 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 forcompanies seeking to use short-form registration when registering securities for publicsale.

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 rulesand replace them with alternative criteria.

Under both Basel II and SEC regulations, not just any CRA's ratings can be used forregulatory purposes. (If this were the case, it would present amoral hazard.[citation needed])Rather, there is a vetting process of varying sorts. TheBasel II guidelines (paragraph 91,

et al.), for example, describe certain criteria that bank regulators should look to whenpermitting the ratings from a particular CRA to be used. These include "objectivity,""independence," "transparency," and others. Banking regulators from a number ofjurisdictions have since issued their own discussion papers on this subject, to furtherdefine how these terms will be used in practice. (SeeThe Committee of EuropeanBanking Supervisors Discussion Paper, or the State Bank of Pakistan ECAI Criteria.)

In the United States, since 1975, NRSRO recognition has been granted through a "NoAction Letter" sent by the SEC staff. Following this approach, if a CRA (or investmentbank or broker-dealer) were interested in using the ratings from a particular CRA forregulatory purposes, the SEC staff would research the market to determine whetherratings 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 indicatingthat if a regulated entity were to rely on the CRA's ratings, the SEC staff will notrecommend enforcement action against that entity. These "No Action" letters are madepublic and can be relied upon by other regulated entities, not just the entity making theoriginal request. The SEC has since sought to further define the criteria it uses whenmaking this assessment, and in March 2005 published a proposed regulationto thiseffect.
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On September 29, 2006, US President George W. Bushsigned into law the "CreditRating Reform Act of 2006".[2] This law requires the US Securities and ExchangeCommission to clarify how NRSRO recognition is granted, eliminates the "No ActionLetter" 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 offreedom ofspeech.[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 orencouragement. This may, however, be counterproductive, if it dulls the marketmechanism by which agencies compete, subsidizing less-capable agencies and penalizingagencies that devote resources to higher-quality opinions.

[edit] Ratings use in structured finance

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

Companies involved in structured financing arrangements often consult with credit ratingagencies to help them determine how to structure the individual tranches so that eachreceives a desired credit rating. For example, a firm may wish to borrow a large sum ofmoney by issuing debt securities. However, the amount is so large that the returninvestors may demand on a single issuance would be prohibitive. Instead, it decides toissue three separate bonds, with three separate credit ratingsA (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 muchless than the rate it must pay on the BB-rated bonds, but that, overall, the amount it mustpay 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 consultwith a credit rating agency to see how it must structure each tranchein other words,what types of assets must be used tosecurethe debt in each tranchein order for thattranche to receive the desired rating when it is issued.

There has been criticism in the wake of large losses in thecollateralized debt obligation(CDO) market that occurred despite being assigned top ratings by the CRAs. Forinstance, losses on $340.7 million worth of collateralized debt obligations (CDO) issued
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by Credit Suisse Group added up to about $125 million, despite being rated AAA or Aaaby 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 factorsof 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 suchadvice.

Complicating matters, particularly where structured finance transactions are concerned,the rating agencies state that their ratings are opinions (and as such, are protected freespeech, granted to them by the "personhood" of corporations) regarding the likelihoodthat a given debt security will fail to be serviced over a given period of time, and not anopinion on the volatility of that security and certainly not the wisdom of investing in thatsecurity. In the past, most highly rated (AAA or Aaa) debt securities were characterized

by low volatility and high liquidityin other words, the price of a highly rated bond didnot 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 ofsimilar (and similarly rated) securities tend to concentrate similar risk in such a way thateven a slight change on a chance of default can have an enormous effect on the price ofthe bundled security. This means that even though a rating agency could be correct in itsopinion that the chance of default of a structured product is very low, even a slightchange in the market's perception of the risk of that product can have a disproportionateeffect on the product's market price, with the result that an ostensibly AAA or Aaa-ratedsecurity 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 ratingsin securities and banking regulation (as noted above) assumes that high ratingscorrespond 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. Forexample, Enron's rating remained at investment grade four days before thecompany went bankrupt, despite the fact that credit rating agencies had been

aware of the company's problems for months.[5][6]Some empirical studies havedocumented that yield spreads of corporate bonds start to expand as credit qualitydeteriorates but before a rating downgrade, implying that the market often leads adowngrade and questioning the informational value of credit ratings.[7] This hasled to suggestions that, rather than rely on CRA ratings in financial regulation,financial regulators should instead require banks, broker-dealers and insurancefirms (among others) to use credit spreads when calculating the risk in theirportfolio.
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Large corporate rating agencies have been criticized for having too familiar arelationship with company management, possibly opening themselves to undueinfluence or the vulnerability of being misled.[8] These agencies meet frequently inperson with the management of many companies, and advise on actions thecompany 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 thaninvestors, for their ratings. This has led to accusations that these CRAs areplagued by conflicts of interest that might inhibit them from providing accurateand honest ratings. At the same time, more generally, the largest agencies(Moody's and Standard & Poor's) are often seen as promoting a narrow-mindedfocus on credit ratings, possibly at the expense of employees, the environment, orlong-term research and development. These accusations are not entirelyconsistent: on one hand, the larger CRAs are accused of being too cozy with thecompanies they rate, and on the other hand they are accused of being too focusedon 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 existingclients, CRAs have also been accused of engaging in heavy-handed "blackmail"tactics in order to solicit business from new clients, and lowering ratings for thosefirms . For instance, Moody's published an "unsolicited" rating ofHannover Re,with a subsequent letter to the insurance firm indicating that "it looked forward tothe day Hannover would be willing to pay". When Hannover managementrefused, Moody continued to give Hannover Re a rating, which were downgradedover successive years, all while making payment requests that the insurerrebuffed. 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 wereshocked by the downgrade and Hannover lost $175 million USD in marketcapitalization.[9]

The lowering of a credit score by a CRA can create a vicious cycle, as not onlyinterest rates for that company would go up, but other contracts with financialinstitutions may be affected adversely, causing an increase in expenses andensuing decrease in credit worthiness. In some cases, large loans to companiescontain a clause that makes the loan due in full if the companies' credit rating islowered 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 layclaim to a weak company's assets before the company declaresbankruptcy and areceiveris appointed to divide up the claims against the company. The effect ofsuch 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 becomedue in full; since the troubled company likely is incapable of paying all of theseloans in full at once, it is forced into bankruptcy (a so-called "death spiral").These rating triggers were instrumental in the collapse ofEnron. Since that time,major agencies have put extra effort into detecting these triggers and discouraging
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their use, and the U.S. Securities and Exchange Commission requires that publiccompanies in the United States disclose their existence.

Agencies are sometimes accused of being oligopolists,[10]because barriers tomarket 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 thatdiscloses its financial results without dilution by non-ratings businesses, and itshigh profit margins (which at times have been greater than 50 percent of grossmargin) can be construed as consistent with the type of returns one might expectin an industry which has high barriers to entry.

Credit Rating Agencies have made errors of judgment in rating structuredproducts, particularly in assigning AAA ratings to structured debt, which in alarge number of cases has subsequently been downgraded or defaulted. The actualmethod by which Moody's rates CDOs has also come under scrutiny. Ifdefault

models are biased to include arbitrary default data and "Ratings Factors are biasedlow compared to the true level of expected defaults, the Moodys [method] willnot generate an appropriate level of average defaults in its default distributionprocess. As a result, the perceived default probability of rated tranches from ahigh yield CDO will be incorrectly biased downward, providing a false sense ofconfidence to rating agencies and investors.".[11] Little has been done by ratingagencies to address these shortcomings indicating a lack of incentive for qualityratings of credit in the modern CRA industry. This has led to problems for severalbanks whose capital requirements depend on the rating of the structured assetsthey hold, as well as large losses in the banking industry.[12][13][14] AAA ratedmortgage 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 beingconsidered for downgrade by Fitch, which expects most to downgrade to anaverage of BBB to BB-. These levels of reassessment are surprising for AAArated bonds, which have the same rating class as US government bonds.[15][16]

Most rating agencies do not draw a distinction between AAA on structuredfinance and AAA on corporate or government bonds (though their ratings releasestypically 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 ofdowngrades to their CDO portfolio. The structure of the Basel II agreementsmeant that CDOs capital requirement rose 'exponentially'. This made CDOportfolios vulnerable to multiple downgrades, essentially precipitating a largemargin call. For example underBasel II, a AAA rated securitization requirescapital allocation of only 0.6%, a BBB requires 4.8%, a BB requires 34%, whilsta BB(-) securitization requires a 52% allocation. For a number of reasons(frequently having to do with inadequate staff expertise and the costs that riskmanagement programs entail), many institutional investors relied solely on theratings agencies rather than conducting their own analysis of the risks theseinstruments posed. (As an example of the complexity involved in analyzing someCDOs, the Aquarius CDO structure has 51 issues behind the cash CDO
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component of the structure and another 129 issues that serve as reference entitiesfor $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 180issues implies that the Aquarius CDO has exposure to about 1.2 million loans.)Pimco founderWilliam Grossurged investors to ignore rating agency judgments,

describing the agencies as "an idiot savant with a full command of themathematics, but no idea of how to apply them."[17]

Ratings agencies, in particular Fitch, Moody's and Standard and Poors have beenimplicitly allowed by governments to fill a quasi-regulatory role, but because theyare for-profit entities their incentives may be misaligned. Conflicts of interestoften arise because the rating agencies, are paid by the companies issuing thesecurities an arrangement that has come under fire as a disincentive for theagencies to be vigilant on behalf of investors. Many market participants no longerrely on the credit agencies ratings systems, even before the economic crisis of2007-8, preferring instead to use credit spreads to benchmarks like Treasuries or

an index. However, since the Federal Reserve requires that structured financialentities be rated by at least two of the three credit agencies, they have a continuedobligation.

Many of the structured financial products that they were responsible for rating,consisted of lower quality 'BBB' rated loans, but were, when pooled together intoCDOs, assigned an AAA rating. The strength of the CDO was not whollydependent on the strength of the underlying loans, but in fact the structureassigned to the CDO in question. CDOs are usually paid out in a 'waterfall' stylefashion, where income received gets paid out first to the highest tranches, with theremaining income flowing down to the lower quality tranches i.e.


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As part of the Sarbanes-Oxley Act of 2002, Congress ordered the U.S. SEC to develop areport, titled Report on the Role and Function of Credit Rating Agencies in the Operationof the Securities Marketsdetailing how credit ratings are used in U.S. regulation and thepolicy issues this use raises. Partly as a result of this report, in June 2003, the SECpublished 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 inits report. Public comments on this concept release have also been published on the SEC'swebsite.

In December 2004, the International Organization of Securities Commissions (IOSCO)published a Code of Conduct for CRAs that, among other things, is designed to addressthe types of conflicts of interest that CRAs face. All of the major CRAs have agreed tosign on to this Code of Conduct and it has been praised by regulators ranging from theEuropean Commission to the U.S. Securities and Exchange Commission.

[edit] List of Credit Rating Agencies

For more information, seeBond 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'sInvestor ServiceandFitch 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 isused as an alternative to one of the other majors.[22]

[edit] CRA Business Models
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Most credit rating agencies follow one of two business models. Originally, all CRAsrelied on a "subscriber-based" business model where the CRA would not distribute theratings for free but would instead only provide the ratings to subscribers to the CRA'spublications. Subscription fees would provide the bulk of the CRA's income. Today, mostsmaller 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, JapanCredit Ratings, R&I, A.M. Best and others) today rely on an "issuer-pays" businessmodel in which most of the CRA's revenue comes from fees paid by the issuersthemselves. Under this business model, while subscribers to the CRA's services are stillprovided with more detailed reports analyzing an issuer, these services are a minor sourceof income and most ratings are provided to the public for free. Proponents of this modelargue that if the CRA relied only on subscriptions for income, the vast majority of bondswould go unrated since subscriber interest is low for all but the largest issuances. Theseproponents also argue that while they face a clear conflict of interest vis-a-vis the issuersthey 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 theCRA may feel obligated to publish ratings that support that subscriber's investmentdecisions.


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Before you decide whether to invest into adebt securityfrom a company or foreign

country, you must determine whether the prospective entity will be able to meet itsobligations. A ratings company can help you do this. Providing independent objectiveassessments of the credit worthiness of companies and countries, a credit ratingscompany helps investors decide how risky it is to invest money in a certain countryand/or security.

document.write('');

Credit in the Investment WorldAs investment opportunities become more global and diverse, it is difficult to decide notonly which companies but also which countries are good investment opportunities. Thereare advantages to investing in foreign markets, but the risks associated with sendingmoney abroad are considerably higher than those associated with investing in your owndomestic market. (For more insight, seePros And Cons Of Offshore Investing.)It isimportant to gain insight into different investment environments but also to understandthe risks and advantages these environments pose. Measuring the ability and willingnessof an entity - which could be a person, a corporation, a security or a country - to keep itsfinancial commitments or its debt, credit ratings are essential tools for helping you makesome investment decisions.

The Raters

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

Ratings can be assigned to short-term and long-term debt obligations as well as securities,
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loans,preferred stockand insurance companies. Long-term credit ratings tend to be moreindicative of a country's investment surroundings and/or a company's ability to honor itsdebt 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 anentity's ability to pay debts in both foreign and local currencies. A lack of foreignreserves, for example, may warrant a lower rating for those obligations a country made inforeign currency.

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

The Ratings Are In

The ratings lie on a spectrum ranging between highest credit quality on one end and

defaultor "junk" on the other. Longterm credit ratings are denoted with a letter: a tripleA (AAA) is the highest credit quality, and C or D (depending on the agency issuing therating) is the lowest or junk quality. Within this spectrum there are different degrees ofeach rating, which are, depending on the agency, sometimes denoted by a plus ornegative sign or a number.

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

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

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

Bond Rating

Grade RiskMoody's

Standard &

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
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Sovereign Credit Ratings

As previously mentioned, a rating can refer to an entity's specific financial obligation orto its general creditworthiness. A sovereign credit rating provides the latter as it signifiesa 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 ofpublic and private investment flows, foreign direct investment, foreign currency reserves,political stability, or the ability for a country's economy to remain stable despite politicalchange.

Because it is the doorway into a country's investment atmosphere, the sovereign rating isthe first thing most institutional investors will look at when making a decision to investmoney abroad. This rating gives the investor an immediate understanding of the level ofrisk associated with investing in the country. A country with a sovereign rating willtherefore get more attention than one without. So to attract foreign money, most countrieswill 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 itsupper limit of credit ratings.

Conclusion

A credit rating is a useful tool not only for the investor, but also for the entities lookingfor investors. An investment grade rating can put a security, company or country on theglobal radar, attracting foreign money and boosting a nation's economy. Indeed, foremerging market economies, the credit rating is key to showing their worthiness ofmoney from foreign investors. (To read more, see What Is An Emerging MarketEconomy?) And because the credit rating acts to facilitate investments, many countriesand companies will strive to maintain and improve their ratings, hence ensuring a stablepolitical 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 YourBusiness Credit Score

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

One of the best ways to lower your business credit score is to pay down outstandingbalances on your accounts. One of the major criteria that thecredit bureaususe todetermine 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 yourcredit score. By paying down the balances, you will free up more of yourcredit lineswhich reflects positively on you as a business. It shows the credit bureaus that you canhave 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 tomake your payments on time. Many people do not realize the impact that makingpayments has to yourcredit score. However, this might be the most important factor

when it comes to determining your score. Every month your creditors are going to reportyour payment to the credit bureaus. If you are late on your payment, they will report it assuch to the bureaus. If you are continuously late, this is going to seriously negativelyimpact your score overall.

3. Increase Credit Limits

Something else that you can do to help move up your score is increasing yourcreditlimits. Call all of yourcredit cardcompanies and other accounts to see if they are willingto bump up your credit line. When you do this, this is going to increase the amount ofavailable 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 creditthat you have on your file, the more your credit score is going to increase with thebureaus.

4. Closing Accounts

Many people feel that they should immediately close out an account after they have paidit off. However, this is not necessarily always in your best interest. If you have a goodpayment history with a particular company, you may want to leave the account open evenif you do not have any balances on it. Credit bureaus look at how long you have hadaccounts 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 gettingcredit in the future.

1. & Improve Credit2. Bad Credit Rating
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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 BurksFrances 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 suchas The Associated Press. Burks's articles have been published by USA Today and othernewspapers. 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 canwork on a strategy to improve your credit rating. Credit-scoring models that determine aconsumer's credit rating vary, but maintaining a low amount of credit-card debt and agood payment history can bolster your rating in any case.

Credit-Card Debto 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 toincrease your credit rating. Lenders tend to pay close attention to whetherloan applicants are maxing out their credit-card limits. Applications areusually viewed more favorably if potential borrowers have low credit-cardbalances. Some financial professionals recommend using less than 30percent of a credit limit. Therefore, you could increase your credit scoreby 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 accountsto increase their credit scores. This strategy can have the opposite effectbecause your credit score is impacted by the length of your credit history.The longer you've maintained credit accounts in good standing, the higheryour credit score will be. Closing older accounts while leaving newer onesopen could hamper your overall credit rating.
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16/23

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 creditrating. Late payments documented on your credit report will hinder your

credit score even if you don't owe a large amount of debt. Considersigning up for your creditors' automatic-payment services if you need helporganizing your debts to get them paid on time. Many creditors allow theircustomers to have their payments automatically drawn out of theirchecking 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. Forexample, if you have higher credit limits on your accounts than yourreports say you do, it could appear you're maxing out your availablecredit. Federal law allows consumers to request a free credit report onetime per year from the following credit-reporting companies: Equifax,Experian and TransUnion.

1. & Improve Credit2. Bad Credit Rating3. 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
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17/23

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Frances BurksFrances 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 suchas The Associated Press. Burks's articles have been published by USA Today and othernewspapers. Burks has a bachelor's degree in political science from the University ofMichigan.By Frances Burks, eHow Contributor
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18/23

updated: January 11, 2011

You can't quickly remove accurate, negative information in your credit files, but you canwork on a strategy to improve your credit rating. Credit-scoring models that determine aconsumer'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 Debto 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 toincrease your credit rating. Lenders tend to pay close attention to whetherloan applicants are maxing out their credit-card limits. Applications areusually viewed more favorably if potential borrowers have low credit-cardbalances. Some financial professionals recommend using less than 30percent of a credit limit. Therefore, you could increase your credit scoreby 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 accountsto increase their credit scores. This strategy can have the opposite effectbecause your credit score is impacted by the length of your credit history.The longer you've maintained credit accounts in good standing, the higheryour credit score will be. Closing older accounts while leaving newer onesopen 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 creditrating. Late payments documented on your credit report will hinder yourcredit score even if you don't owe a large amount of debt. Considersigning up for your creditors' automatic-payment services if you need helporganizing your debts to get them paid on time. Many creditors allow theircustomers to have their payments automatically drawn out of theirchecking 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. Forexample, if you have higher credit limits on your accounts than your


19/23


20/23

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