When we borrow money from a bank, the bank needs to be sure that we will pay them back. To ensure that they don’t make losses, all the banks in the country get together and keep a record of every citizen’s bank transactions. If they borrow money and don’t return it to one bank, well, all the other banks know about that too. This rating of a person is called their credit score.
What is a credit rating?
Now, suppose that the loan is being taken by an institution like a bank or a company.
How does the ordinary investor know whether they will get their money back?
Specialised organisations called rating agencies keep a score of how that institution has done in the past on repaying debt, does it have enough money to pay back, etc.
The score given to organisations is called the credit rating.