Article by Beth Jennings - 13th December 2018

Your Credit Rating Vs A Country's: What's The Difference?

Professor Edward Altman first published the Altman Z-score formula in 1968 to evaluate the likelihood of a businesses going bust within two years. The legacy of this system lives on, with the fundamental basics of his score helping to shape the Credit Scoring systems we use today - whether that’s a simple application for car finance or assessing the economic strength of an entire nation.

Why do countries have a credit rating?

In some respects, the reasons a country might need to borrow money are similar to those that result in a consumer applying for credit; from time to time it will need to spend more money that it can afford to (or wants to) fund from from cash reserves.

Where a person might exercise their ability to borrow to carry out work on their home, finance larger purchases, or to add a little extra breathing room to their monthly expenditure, a nation might borrow money to spend on infrastructure defence or restructuring national debt. That last point could be likened to consumer debt consolidation – just on a much bigger scale.

Because a country can have a very different economy to even its closest neighbours, Credit Ratings can be used to determine overall economic stability, showing potential lenders how likely a country (via government issued bonds) is to be able to make repayments on any borrowing.

Currency fluctuations, interest rates, GDP, levels of existing debt and historical payment performance are just a few of the factors that affect a country’s Credit Rating. Just like with personal finance, the better a country’s Credit Rating is, the more it is likely to be able to borrow and at a lower rate of interest.

Country Credit Ratings are principally provided by Moody’s, Standard & Poor (S&P) and Fitch Ratings. These scores aren’t provided as a numerical rating (as consumer Credit Scores traditionally are), but as letter grading ranging from AAA to D (though Moody’s use an alphanumerical version of this). It isn’t therefore possible to draw direct comparisons the core principle remains the same: the score provides a tangible probability of a country defaulting.

Obtaining credit as a country

The levels of borrowing and the technical difference in how it works are very different to the consumer world of course but the assessment criteria itself is based on many of the same factors.

Key factors that can affect a country’s Credit Score are:

Debt Maturity

This refers to the final date of repayment for any and all debt. If a country has a maturity age of 500 years, for example, this is considered unattainable and will have a negative impact on their score. A maturity age of 15 years, however, is much more manageable. It’s like to trying to take out a mortgage with a repayment date past your 100th birthday – it’s not likely to happen.

Level of national debt

Relating to the overall amount of debt, a country with a large amount of outstanding credit may find it more difficult to borrow than a country with a smaller level of national debt, similar to the way existing borrowing is assessed on a consumer application.

Debt interest payments in relation to GDP

Think of this like the affordability element when trying to take out a mortgage or other form of credit – basically your income vs your outgoings.

Possibility for economic growth

This is when analysts look at available data and predict how likely it is for a country's economy to grow. A growing economy means that it is more likely that a debt will be repaid.

Payment history

Much like a consumer score, the repayment history of a country is taken into consideration when calculating their Credit Rating. The better the repayment history the more positive the impact it will have the overall score, because more evidence is available to show that debt has been repaid on time in the past.

Just like personal creditworthiness, a country’s ability to borrow is in no small part dictated by how it has repaid debt in the past: If debts are paid on time and repayments kept up to date, this will have a positive effect on a Credit Rating. On the other hand, any borrowing repaid late – or worse still not at all – will have a detrimental effect on both a person’s or a countries Credit Rating and their ability to borrow more in the future.

Where consumers are concerned, there is now much more onus on lenders seek to grant credit responsibly and reduce the risk of over-indebtedness. There is a requirement that a lender must consider the “financial position of the customer at the time of seeking the credit” (FCA Handbook). It’s not quite the same when it comes to a country increasing its national debt, but over-borrowing could have drastic repercussions for the nation’s economy and population.

As previously mentioned, analysts for Moody’s, Standard & Poor (S&P) and Fitch Ratings constantly evaluate trends for economic and trade growth. You will not find the equivalent record for this on a consumer report. The likelihood of a pay rise is not taken into consideration when you apply for credit and isn’t about to any time soon!

So what’s the difference?

There are plenty of similarities between a country’s score and your own: past payment history, levels of existing debt and other monthly ‘outgoings’ play a big role for both when it comes to getting approved for a new line of credit.

The main difference between a country’s credit rating and a consumer’s is that where the calculation for a country involves a fair bit of speculation and subjective interpretation, consumers are largely assessed on facts. For that reason, it’s important to make sure that everything held on your own Credit Report is accurate, as that’s the data that lenders will based their decision on.

To see everything that goes into generating your Credit Rating, you can try checkmyfile free for 30 days, and then for just £14.99 a month afterwards, which you can cancel online, by phone or by email. You’ll get access to the UK's most detailed Credit Report, based on data from 3 Credit Reference Agencies, not just 1.

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