A credit rating can be an investment risk indicator for bonds or other fixed interest investments. They help you understand how likely it is that interest will be paid on time and you’ll get your money back when your investment reaches the end of its term.
1. Rating agencies have different credit rating systems
A credit rating is useful as an initial assessment of risk but it’s only one factor you need to take into account. See understanding risk.
2. A good credit rating doesn’t mean the investment is risk-free
It’s simply the agency’s opinion of the organisation’s ability to meet its financial obligations.
3. Be careful of any investment that’s been rated less than an ‘A’
In most tests, a grade ‘B’ is considered good. This isn’t the case for credit ratings. As shown in RBNZ’s standardised rating scale, an ‘AAA’ rated company has a much lower risk of default (1 in 600 over five years) compared with a ‘B’ rated company (1 in 5 over five years).
4. Ratings issued by financial advisers should be treated with caution
They’re a useful guide but they’re not from approved agencies.
5. Sometimes an organisation might have no credit rating
This doesn’t necessarily mean you should avoid the investment, but you should take extra care to assess the risk. You could ask a financial adviser why there’s no credit rating.
The RBNZ has published a table that maps the rating scales of the three main credit rating agencies.