Our handy guide to credit ratings.

A credit rating gives an independent assessment of a company's – or country's – ability to meet its financial commitments in full and on time. This provides an indication of the "probability of default" and the level of risk you take on if you choose to invest with them.

The credit ratings industry is dominated by three big companies: Standard & Poor's, Moody's and Fitch.

These agencies use different ratings scales, so they can be difficult to compare. However, all of them provide ratings above and below "investment grade" – if a company rates above this level it has good creditworthiness and is relatively low risk. Anything below this becomes "speculative" or "high-risk", and should be avoided by all but the most experienced investors.

The three main rating agencies' investment grade rankings:

The probability of default increases sharply, the lower the credit rating. For example, a Standard & Poor's BBB rating indicates a company has an average 0.3 percent (three in one thousand) probability of not repaying a one-year investment. But a Standard & Poor’s B rating has an average three to eleven percent chance of not repaying the same investment

For instance, banks in New Zealand range from BBB to AAA on Standard & Poor’s rating system. Credit unions and co-operatives with a Standard & Poor’s rating (not all have one) range from B+ to BBB-.

While their ratings are widely used, the big three have attracted controversy. Some have implicated them in the American sub-prime mortgage meltdown, which in turn triggered the global financial crisis.

But the global securities market is complex and reliable information is not readily available to investors. Because of this, credit ratings are still helpful when making decisions about where to place your money.

More information

• Financial advisers
• Managed funds

Got a question or comment on this topic? Share your views and experiences with other Consumer members...