A credit rating is an opinion, published by a credit rating agency, on how likely a borrower is to meet its debt payments in full and on time. Ratings are given to governments, companies, banks, insurers and individual debt issues such as bonds and securitised products, and are expressed as letter grades running from AAA (or Aaa) down to D for default. Investors use them to compare credit risk across thousands of issuers they cannot study individually.
Ratings of bonds and other securities are different from a consumer credit score, which a credit bureau calculates for individuals. The market is dominated by three firms, S&P Global Ratings, Moody's and Fitch Ratings, which together account for the large majority of ratings outstanding. In the United States, agencies whose ratings may be used for regulatory purposes register with the SEC as nationally recognized statistical rating organizations (NRSROs).
Credit rating in plain terms
A credit rating works like a restaurant hygiene grade posted in the window. You do not have to inspect the kitchen yourself; an inspector has looked and summed it up in a letter. AAA means the inspector sees almost no chance of trouble, while a C grade means the kitchen is close to being shut.
Like a hygiene grade, the letter is only one inspector's view at one point in time. It can be out of date, and it does not tell you whether the meal is good value. It is a starting point for judging a borrower, not the whole answer.
Rating scales and the investment-grade line
S&P and Fitch use AAA, AA, A, BBB, BB, B, CCC, CC, C and D, adding plus and minus signs within most bands. Moody's uses Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C, with the numbers 1, 2 and 3 for finer steps. The key boundary is between BBB- (Baa3) and BB+ (Ba1):
- Investment grade. BBB- or above at S&P and Fitch, Baa3 or above at Moody's; these are investment-grade bonds.
- Speculative grade. BB+ or Ba1 and below; these are high-yield or junk bonds.
- Default. D (S&P and Fitch, with Fitch also using RD for restricted default) marks an issuer that has missed payments.
Agencies also publish an outlook (positive, stable or negative) and place ratings on watch when a change may come soon. Short-term debt such as commercial paper has its own scales, for example A-1 at S&P and P-1 at Moody's, which matter to money market funds.
How agencies rate issuers
For a company, analysts study cash flow, debt levels and leverage, industry position, management and the legal terms of each bond. For a corporate bond, the issue rating can sit above or below the issuer rating depending on its seniority and collateral. Sovereign ratings weigh economic strength, institutions, public finances, external debt and the track record of paying; the US government lost its last AAA when Moody's cut it to Aa1 on 16 May 2025. Structured products such as collateralized debt obligations are rated using models of the underlying loan pool.
Most ratings follow the issuer-pays model: the borrower pays the agency to rate its debt. A few firms use a subscriber-pays model, charging investors instead.
Regulation of rating agencies
The SEC first used the NRSRO label in 1975 in its broker-dealer capital rules. The Credit Rating Agency Reform Act of 2006 created a formal registration regime, and the Dodd-Frank Act of 2010 set up the SEC's Office of Credit Ratings, which examines every NRSRO each year, and told federal agencies to remove rating references from their rules where possible. As of November 2026 the SEC lists 11 registered NRSROs, including the big three plus firms such as A.M. Best, DBRS, Kroll Bond Rating Agency, Egan-Jones and Japan Credit Rating Agency. In the European Union, the European Securities and Markets Authority (ESMA) has registered and supervised rating agencies since 2011 under the EU Credit Rating Agencies Regulation.
Criticism after 2008
Rating agencies were heavily criticised for their role in the 2008 financial crisis. They had given top ratings to many mortgage-backed securities built on sub-prime mortgages, and mass downgrades in 2007–2008 helped turn housing losses into a banking crisis. The US Financial Crisis Inquiry Commission described the agencies as key enablers of the financial meltdown. S&P paid about $1.375 billion in 2015, and Moody's about $864 million in 2017, to settle US federal and state claims over those ratings.
Other long-running criticisms are the conflict of interest in the issuer-pays model, ratings that lag rather than lead events (Enron was investment grade days before its 2001 collapse), and the cliff effects caused when downgrades force sales. Investors can cross-check ratings against market signals such as the credit spread and the price of a credit default swap. Critics also point to the industry's structure: three agencies dominate global ratings, a textbook oligopoly in which a few large firms face limited competition.