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Credit rating explained

What are credit ratings?

Credit ratings are a score given to governments and companies that illustrate how creditworthy they are based on their previous transactions.

Agencies such as Moody’s, Fitch and Standard & Poor’s are trusted to provide this information. A rating of AAA suggests that a borrower has been able to successfully fulfill the terms of an agreement in the past, and this behavior is likely to continue. On the other end of the scale, a C or D would serve as a warning to would-be lenders that there’s a high risk of non-payment if a loan is granted. Each agency tends to present ratings in a slightly different way.

As well as being used to determine whether a lender should enter into an agreement with a borrower, credit ratings help banks calculate the interest rates attached to a loan. Governments and companies with an excellent score are likely to have a lower interest rate, making the cost of borrowing cheaper. Meanwhile, those with a more checkered past often end up paying higher levels of interest to reflect the risk that the lender offering them a loan.

Investors can also rely on these ratings when they are deciding whether or not to purchase bonds that have been issued by governments or companies.

Credit ratings are not to be confused with credit scores, which are used when individuals want to take out personal loans or mortgages. Here, numerical scores are provided to indicate the applicant’s creditworthiness – and detailed reports provide information about how many credit cards they have, whether they have high unpaid balances, and how long these accounts have been active.

Tokenised securities are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how tokenised securities and leverage work and whether you can afford to take the high risk of losing your money. Nothing in the above article should be regarded as a recommendation to trade generally, to trade on a particular platform or to trade in a particular asset. Asset prices can go down as well as up and past performance is not a guide to future performance. Investors and traders should thoroughly research an asset or strategy before making any trading or investment decision and if necessary seek professional advice.
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