A credit rating is a rating agency's opinion of a borrower's ability and willingness to pay its debts in full and on time, expressed as a letter grade. Agencies rate companies, banks, insurers, governments and individual bonds, and the grades rank them by relative credit risk: the higher the grade, the less likely the agency judges a default to be. It is an opinion rather than a measurement, it covers one risk out of several, and it applies to debt, not to shares. For a saver comparing a bond or bond fund with Treasury bills and insured deposits, the subject of the safe investments hub, a rating is a starting point rather than a verdict.
How do the S&P, Moody's and Fitch rating scales compare?
The scales match notch for notch: S&P and Fitch grade down from AAA with plus and minus signs, and Moody's from Aaa with the numbers 1, 2 and 3.
| Band | S&P Global | Moody's | Fitch | How the agencies describe it |
|---|---|---|---|---|
| Investment grade | AAA | Aaa | AAA | Highest quality; capacity to pay is extremely strong |
| Investment grade | AA+, AA, AA- | Aa1, Aa2, Aa3 | AA+, AA, AA- | Very strong capacity; very low credit risk |
| Investment grade | A+, A, A- | A1, A2, A3 | A+, A, A- | Strong, but more exposed to a weak economy |
| Investment grade | BBB+, BBB, BBB- | Baa1, Baa2, Baa3 | BBB+, BBB, BBB- | Adequate; Moody's says Baa may carry speculative characteristics |
| Speculative grade | BB+, BB, BB- | Ba1, Ba2, Ba3 | BB+, BB, BB- | Major ongoing uncertainties; substantial credit risk |
| Speculative grade | B+, B, B- | B1, B2, B3 | B+, B, B- | Paying today, but bad conditions would likely impair that |
| Speculative grade | CCC+, CCC, CCC- | Caa1, Caa2, Caa3 | CCC+, CCC, CCC- | Currently vulnerable; default is a real possibility |
| Speculative grade | CC, C | Ca, C | CC, C | Default probable, imminent or under way |
| Default | SD, D | No separate symbol; C is typically in default | RD, D | Missed payments, a distressed exchange or bankruptcy |
All three long-term scales have 21 notches from the top grade down to C. S&P and Fitch attach a plus or minus to every category from AA to CCC, and Moody's appends 1 for the top of a category, 2 for the middle and 3 for the bottom, from Aa to Caa. So S&P's A- and Moody's A3 occupy the same notch, and a one-notch cut from AA+ lands on AA. Debt due within about a year, such as commercial paper, gets a separate short-term scale whose top grades are A-1+ at S&P, P-1 at Moody's and F1+ at Fitch.
Where does investment grade end and junk begin?
The dividing line sits between BBB- and BB+, or Baa3 and Ba1 at Moody's: everything at or above BBB- is investment grade, and everything below is speculative grade.
The SEC's investor bulletin draws the line in the same place, and bond indices are built around it. Investment-grade indices admit only bonds above the line, and the high-yield market starts just below it. A company whose rating falls across the line is called a fallen angel and one that climbs above it a rising star; in Fitch's corporate portfolio, 2025 brought 17 of the first and 29 of the second. Because index providers combine three agencies' opinions, a bond with a split rating can count as investment grade in one index family and junk in another.
Worked example: A split-rated bond in three index families
Suppose a company's bond is rated Baa3 by Moody's, BB+ by S&P and BBB by Fitch. Number the notches from 1 for AAA, so BBB is 9, BBB- or Baa3 is 10 and BB+ is 11.
- Bloomberg uses the middle of the three ratings. Sorted, they are 9, 10 and 11, so the index rating is 10, Baa3/BBB-, and the bond qualifies for the investment-grade US Aggregate index.
- ICE averages the three: (9 + 10 + 11) ÷ 3 = 10, again BBB-, so the bond passes ICE's investment-grade test.
- S&P Dow Jones Indices takes the lowest of the three when all three agencies rate a bond. That is BB+, so the bond is not eligible for its investment-grade aggregate index.
- If Moody's then cut the bond one notch to Ba1, the ratings would be 9, 11 and 11. Bloomberg's middle rating becomes 11, or BB+, and the bond drops out of the investment-grade index at the next month-end rebalancing.
How often do bonds default at each rating?
Default rates rise steeply down the scale: in Fitch's 1990 to 2025 corporate data, 0.86% of BBB issuers defaulted within five years, against 49.93% at CCC to C.
Fitch published the figures in its corporate transition and default study on July 27, 2026. It groups every issuer it rated at the start of each year and records how many defaulted over the next one to ten years, counting issuers rather than dollars.
| Fitch rating at the start of the year | Defaulted within 1 year | Within 5 years | Within 10 years |
|---|---|---|---|
| AAA and AA | None | None | None |
| A | 0.01% | 0.34% | 0.99% |
| BBB | 0.10% | 0.86% | 1.90% |
| BB | 0.59% | 4.91% | 7.89% |
| B | 2.65% | 15.37% | 18.55% |
| CCC to C | 27.60% | 49.93% | 55.42% |
| All investment grade | 0.07% | 0.64% | 1.44% |
| All speculative grade | 3.25% | 12.12% | 15.20% |
The single step from BBB to BB multiplies the five-year rate by almost six (4.91 ÷ 0.86 = 5.7). The table averages many annual groups, and single years differ widely: 56 Fitch-rated companies defaulted in 2009 and again in 2020, rates of 3.8% and 2.8%, while 2025 had 26 defaults, all speculative grade, and a third straight year with no investment-grade default. The top rows rest on few issuers, and Fitch had no AAA-rated company in its corporate portfolio at the end of 2025. These are records of what happened, not forecasts of what will.
A default rate becomes a cost once you allow for what holders get back. The expected loss is the chance of default times the share of the money that is not recovered:
Worked example: Expected default loss on $10,000 of BBB and single-B bonds
Use Fitch's five-year default rates as the probabilities, and assume holders recover 40 cents per dollar after a default, inside the 31% to 50% band that Fitch's recovery scale calls average.
- BBB: $10,000 × 0.0086 × (1 − 0.40) = $51.60 over five years, about $10 a year
- Single B: $10,000 × 0.1537 × (1 − 0.40) = $922.20 over five years, about $184 a year
- Extra yield over Treasuries on October 29, 2026, from the ICE BofA option-adjusted spreads: 1.10 points for BBB, or $110 a year on $10,000, and 3.32 points for single B, or $332 a year
- Left after average losses: about $100 a year at BBB and about $148 at single B
On these numbers the extra yield more than covered the historical average loss at both grades. The surplus pays for uncertainty, for thinner trading and for the bad years when defaults bunch together, and a small portfolio can fare far worse than the average. How that extra yield is measured, and why it widens under stress, is covered under credit spread.
What does a credit rating measure, and what does it miss?
A rating measures the relative risk that a borrower will not pay as promised; it ignores price swings, trading costs, yield and value.
The agencies phrase the target differently. S&P calls an issue rating a forward-looking opinion of creditworthiness that weighs the likelihood of payment, the terms of the debt and where it ranks in a bankruptcy. Moody's long-term ratings reflect both the likelihood of default and the expected financial loss if one occurs. Fitch describes its issuer default ratings as an ordinal ranking of vulnerability to default, not a prediction of a specific percentage. No agency turns a letter into a promised default rate; the table above is history, not a calibration.
The SEC's investor bulletin lists what a rating leaves out: market and liquidity risk, the price at which a security is offered or sold, and any view on whether to buy, sell or hold it. It adds that a rating is no guarantee and that debt rated AAA sometimes defaults. The worst failure on record came in structured securities rather than companies. The Financial Crisis Inquiry Commission found that Moody's rated nearly 45,000 mortgage-related securities triple-A from 2000 to 2007, and that 83% of those it rated triple-A in 2006 were ultimately downgraded.
Ratings also carry a built-in conflict. Under the issuer-pay model, which the SEC's April 2026 staff report calls the primary business model of registered agencies, the company being rated pays for its rating. Since the Credit Rating Agency Reform Act of 2006, agencies seeking the status of nationally recognized statistical rating organization register with the SEC, which inspects them but is barred by law from regulating the substance of their ratings or their methodologies. Eleven are registered, and three dominate: of 2,192,543 ratings outstanding at the end of 2025, S&P held 1,077,798, Moody's 684,055 and Fitch 274,291, together about 93%.
What do rating outlooks and watch lists mean?
An outlook signals a rating's likely direction over the next one to two years; a watch or review flags a possible change in the near term.
S&P's outlooks look ahead generally up to two years for investment-grade ratings and up to one year for speculative-grade ones, and can be positive, negative, stable or developing. Its CreditWatch list is for identifiable events, such as mergers, recapitalizations or regulatory actions, that could move a rating soon, and S&P says a listing does not make a change inevitable. Moody's uses the same four outlooks and places ratings on review for upgrade or downgrade. Its own records show why an outlook deserves attention without being treated as a verdict: about a third of issuers given a negative outlook have been downgraded within 18 months, and about 90% of ratings with a stable outlook have not changed in the following year.
Why was the US downgraded from AAA?
Each agency cut the United States one notch over rising debt and doubts about budget governance: S&P in 2011, Fitch in 2023 and Moody's in 2025.
S&P lowered its long-term rating from AAA to AA+ on August 5, 2011. Fitch made the same move on August 1, 2023, and Moody's cut its rating to Aa1 from Aaa on May 16, 2025, which it called a one-notch downgrade on its 21-notch scale. The grades have held since: S&P affirmed AA+ on June 26, 2026 and Fitch on August 13, 2026, both with stable outlooks, and Moody's has kept a stable outlook since its cut. The episode shows two traits of ratings in general. A rating is a contestable opinion: the Treasury Secretary called Fitch's 2023 decision arbitrary and based on outdated data. And a downgrade rewrites no contract, so every Treasury kept paying the same coupons on the same dates. How yields reacted to each cut, and the debt-limit risk behind them, is covered in are Treasuries risk-free?
Where do you see credit ratings?
You meet ratings on bond quotes, fund fact sheets, municipal bond disclosures and insurer marketing, and in the rules behind some cash products.
- Bond quotes and new issues. Brokerage bond screens and offering documents show each agency's grade beside the price and yield to maturity, and a split rating appears as three different letters.
- Bond funds. Fact sheets break holdings down by rating band. An investment-grade fund holds mostly BBB- and above; a high-yield fund holds mostly BB+ and below.
- Money market funds. Since SEC amendments adopted in 2015, with compliance from October 14, 2016, Rule 2a-7 no longer requires top short-term ratings; a fund may buy a security only after deciding it presents minimal credit risks. How money market funds work covers the rest of the rule.
- Municipal bonds. States and cities are rated on the same letter scales, and an insured issue can carry both an insured rating and an underlying one that ignores the insurance, which S&P calls a SPUR. See municipal bond.
- Stable value funds and annuities. The insurers behind wrap contracts and annuities are graded too, including by A.M. Best, which is registered with the SEC to rate insurance companies. Stable value funds explained shows why those grades matter.
- Bank deposits. A bank's rating matters little to an insured depositor, because FDIC insurance covers $250,000 per depositor, per insured bank, per ownership category whatever the bank's grade; FDIC insurance explained sets out the categories.
How is a credit rating different from a credit score or a credit spread?
A credit rating grades the default risk of a bond issuer; a credit score predicts how an individual will repay; a credit spread is the market's price for credit risk.
| Term | What it grades | Scale | Who sets it, and how often it moves |
|---|---|---|---|
| Credit rating | A company, government or bond | AAA to D, or Aaa to C | An agency committee, whenever it takes a rating action |
| Credit score | A person's likely repayment behavior | Most scores run from 300 to 850 | A scoring model, recalculated from credit report data |
| Credit spread | Extra yield over a Treasury of the same maturity | Percentage points or basis points | Buyers and sellers, every trading day |
| National-scale rating | An issuer against others in one country | Letters with a country code, such as AAA(mex) | An agency; not comparable with global-scale grades |
| Short-term rating | Debt due within about a year | Top grades A-1+, P-1 and F1+ | An agency, alongside the long-term rating |
In everyday speech, especially outside the US, "credit rating" often means a personal credit score. The two are unrelated: lenders use scores built from credit reports to set the rate and limit on a mortgage or card, while bond investors use agency ratings. A spread and a rating usually move the same way, but spreads change every trading day and ratings only when a committee acts, so a bond's price can fall well before its grade does.
What mistakes do people make with credit ratings?
The most common mistake is treating a rating as a forecast of returns or prices, when it is only a ranked opinion of default risk.
- Treating all investment grade as one grade. In Fitch's data the five-year default rate at BBB, 0.86%, was about two and a half times the 0.34% at A. BBB is also the biggest bucket: 951 issuers, 39.2% of Fitch's corporate portfolio at the end of 2025, sat one category above junk.
- Mixing up the scales. Moody's Baa3 equals S&P's BBB-, the last investment-grade notch, and Moody's Ba1 is the first junk notch. A grade with a country code, such as AA(mex), ranks an issuer against local borrowers only.
- Assuming one rating fits every bond an issuer sells. S&P's issue ratings weigh where a bond ranks in a bankruptcy, so a company's subordinated debt can be rated below its senior bonds.
- Reading a downgrade as a default. A downgrade lowers an opinion and leaves the coupon unchanged. Default has its own symbols: SD or D at S&P and RD or D at Fitch.
- Relying on an old grade. Ratings can change at any time, and an outlook or watch listing is often the first sign. Check the date of the last rating action, not only the letter.
A rating speaks to one entry in the wider list of risks a bond carries, compared in types of investment risk. The Treasury yields that rated bonds are priced against are charted on the Treasury yield curve page.