Credit rating: what is it and how to use it?

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Credit rating: what is it and how to use it?

Credit rating: Nikolai kept money in one of the banks and did not worry: after all, his deposit is protected by the deposit insurance system. But when deposit rates began to drop, he decided to invest his money somewhere else to get more income. How to understand who can be trusted with savings without much concern, and who is better not to mess with? We tell you what credit ratings are and how they help you understand the risks.

What does a credit score show?

A credit score is an indicator that helps you understand how safe it is to trust an organization with your money. Banks, insurance companies, non-state pension funds (NPFs) and other financial institutions that work with private clients usually have such ratings.

The rating takes into account not only the current financial position of the company, the amount of capital and the volume of debts, but also the entire previous financial history. The high credit rating of the organization means that it is practically safe to trust it with money: it has always paid the bills before and now its position is quite stable. And low – that you are taking a big risk by contacting her: her business is not going very well and it is extremely likely that she will go bankrupt.

Credit ratings can also be assigned to the country as a whole, individual regions, industrial enterprises and many other organizations. The ratings reflect their ability to repay the loans taken.

In addition, there are separate ratings for bond . They assess the ability of issuing companies to repay them on time and pay income on them. At the same time, even for the same company, different bonds can have different ratings if the risks for them differ. For example, subordinated bonds are usually rated lower, which means that the risk for the buyer is higher.

What are the types of credit ratings?

There is no unified global or even all-Russian rating system. However, credit ratings of different agencies, especially high ones, are usually comparable with each other . For example, “A+” in one system may have the same meaning as “A1” in another system and “ruA+” in a third.

As a rule, ratings with the letter “A” indicate the most creditworthy companies, those with the letter “B” – medium in terms of reliability, and those with the letter “C” – close to bankruptcy. If you see the letter “D” in the rating designation, this means default: the company has already refused to pay its debts and has actually dropped out of the financial game.

There are also gradations within the letter categories: for example, the rating “BBB” is higher than “BB” and “B”, and “A +” is higher than “A” and “A—”.

Together with the rating, the agencies publish a forecast: for example, “stable”, “positive” or “negative”. It shows whether analysts expect the financial position of the organization to change in the coming year and in what direction.

Where can you see credit scores?

On the websites of credit rating agencies. These are special independent organizations that evaluate companies and their securities based on their own methodologies. These methodologies must comply with the law, and the Bank of Russia monitors this. In our country, only agencies included in  the regulator’s register can assign public ratings .

Leading domestic companies that attract foreign investors may also have ratings from foreign credit rating agencies. The largest, world-famous of them are Moody’s, S&P and Fitch, the so-called “big three”. All of them have branches in Russia and maintain websites in Russian: there you can see the ratings of Russian industrial and financial giants, as well as their Eurobonds.

Agencies constantly monitor the financial condition of organizations that have been given ratings. If this state changes, they can raise or lower their ratings. Therefore, it makes sense to follow the financial news and periodically re-check the credit ratings of the selected company or financial instrument.

When do I need credit scores?

When choosing a financial institution or securities of a company, it is worth comparing the data of different rating agencies and reading the descriptions of credit ratings on their websites. This will allow you to more clearly understand the financial condition of the organization you are interested in.

Banks

By themselves, deposits in banks are quite reliable investments. Money in the accounts of individuals, including individual entrepreneurs, is protected by the state deposit insurance system . Even if the bank’s license is revoked, the amount within 1.4 million rubles will be returned to you quickly. Just make sure that the chosen organization has a license from the Bank , and then make sure that you have no more than 1.4 million rubles on all your accounts in one bank, including interest on deposits.

If you want to put a larger amount on a deposit or open an account for your business, then the approach to choosing a bank should be more serious, since the guarantee of the deposit insurance system does not apply to such investments. Focus on high and medium credit ratings that have the letter “A” or at least two letters “B” .

Insurance companies and non-state pension funds (NPFs)

You need to be even more careful in choosing financial partners if you want to invest your money for a long time. For example, they decided to save money for the education of a child or for their own pension with the help of endowment life insurance or an agreement with an NPF .

Since the savings will have to be entrusted to them for a long time, and these deductions do not fall into the deposit insurance system, the requirements for reliability must be high. It is better to choose credit ratings of insurance companies and NPFs not lower than “BBB” . And among the most reliable, choose those that show the maximum profitability over the course of several years.

Microfinance organizations (MFIs)

Investing in MFIs is becoming more and more popular as they offer substantially higher returns than banks. But such investments also do not fall into the state deposit insurance system, so the reliability of MFIs should be carefully assessed.

MFIs are less likely than banks to receive credit ratings. If a microfinance organization is nevertheless concerned about this, this already speaks in its favor.

If you want to entrust the savings of MFIs for a short time – up to three months, you can take a chance and choose an MFI with  a rating where there is only one or two letters “B” . If you intend to conclude an agreement for a longer period, you should focus on companies with a credit rating of at least ” BBB- “. It is important to visit the websites of rating agencies from time to time and re-check this data.

Bonds

Bonds  are the most predictable securities. Income on them, unlike shares and other financial instruments, is known in advance. Risk too – it just shows the rating of bonds. At the same time, profitability and risk are closely related: the more profit you are promised, the higher the chance of not getting it.

It is possible to buy bonds with a high credit rating, such as AAA, but with a moderate yield. Or you can take a risk: invest in more profitable securities with a rating  of “B” . In this case, everything will depend on the situation on the financial market. If there are no global shocks, the company will pay its obligations on time and in full. But if some external shock happens that the company is not able to influence, it may find itself in an unstable position and refuse to pay.

It is still better for novice investors not to consider papers with a lower rating, so as not to lose money and not be disappointed in the stock market once and for all.

It is not necessary to waste time and select bonds with a high rating on the websites of rating agencies yourself. Stock exchanges include all the most reliable securities in a special list – the first quotation list, or the first  listing level . These lists can be found on the website of a particular exchange.

Stock

Stocks themselves , unlike bonds, do not have credit ratings. Therefore, when choosing stocks, you can look at the ratings of the companies that issued them. However, if a company regularly pays its debts (and therefore has a high credit rating), this does not mean that its business is steadily going uphill and its shares will grow in price.

In the case of shares, it is better to look not only and not so much at the rating of the issuing company, but at  the level of listing of these securities on stock exchanges.

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