AAA is the highest possible credit rating assigned by the ratings agencies Standard and Poor’s, Moody’s, or Fitch. Being given an AAA rating means that the borrower is stable and may be relied on to pay any loans taken out.
The equivalent of an AAA rating in the context of bonds is AA. AA bonds have low returns, but may be more preferable for careful investors as they are also very low-risk.
A credit rating is an indication of a borrower’s ability to pay a loan. A borrower’s credit worthiness may change over time depending on the borrower’s credit history. Other factors which also come into play include currently-held assets, liabilities, and other factors involving the borrower’s financial history. A poor credit rating may cause the loan request to be denied. Should the loan be approved for a borrower with a poor credit rating, it will probably carry with it stricter conditions and higher interest rates.
Credit ratings do not only function to decide whether a loan should be approved. They may also be used as important information in employment into certain positions, as well as for determining on certain conditions for insurance policies.
Maintaining good credit ratings is not only useful for individuals or companies. A national economy may also benefit from the country’s good credit rating, because it encourages the entry of investors. A sovereign credit rating tells investors how stable a country is as a place for business and investments. Reaching investment grade will encourage more investors, and therefore stimulate economic growth.
