Explain credit ratings and credit scores
The idea
Credit scores and credit ratings both rank credit risk. Scores, used mainly for individuals and small businesses, are ordinal: a higher score means lower risk, but the score is not itself a probability, and it does not adjust for the economic cycle. Ratings from agencies apply to companies, governments and structured securities. They combine financial analysis with judgement and are designed to be stable through the cycle, which means they react slowly and often lag market spreads. Issue ratings can be notched above or below the issuer rating to reflect seniority and expected recovery. Neither provides an exact default probability, and ratings are not recommendations to buy or sell.
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