Before you buy a financial product from your bank or insurance company, check your company’s financial ratings in order to manage your risk.
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When you deal with an insurance company, mortgage company or any other financial entity, they want to know all about you and your credit rating. Financial companies pull your credit history to determine the level of risk when dealing with you. Are you likely to pay back your debt? Do you have a checkered history of insurance claims? They want answers to these questions before extending credit, offering insurance and determining the rates you’ll be charged.
Well, we consumers aren’t the only ones needing to get evaluated for financial stability 😉 . The financial industry itself is regulated and has their own set of ratings to prove their financial strength and excellence. When we’re dealing with money, we need this kind of scrutiny.
These ratings are important as they help us gauge the risk involved in dealing with institutions. When I pass my money over to a financial entity, I cross my fingers that it’s in good hands. These ratings are one way to help me trust that a company will hopefully be around a good long time. It’s also one way to know that a company you’re dealing with has some credibility in its niche.
Who Rates The Financial Industry?
Here is a list of well-known ratings bodies and services commonly used in the financial services industry:
- A.M. Best
- Fitch Ratings
- Moody’s (free registration required)
- Standard & Poor’s (free registration required)
- The Street.com Ratings (formerly Weiss, free short list)
So how are financial companies formally rated? These ratings bodies evaluate a business’ profile, operating performance and balance sheet to determine a company’s stability, creditworthiness and indebtedness. You can find out any company’s ratings through these online ratings services, but you may have to register (for free) before you get the information you need. Note however that the Weiss Ratings (now known as The Street.com Ratings) will charge you $14.99 for specific company ratings, although they do provide their free list of the strongest and weakest financial institutions.
Pertinent Points on Financial Ratings
Here are some of the basic ABC’s of financial ratings:
- Each ratings service has its own ratings standards and ratings scale. Each service has its own way of grading a company. The different ratings tables can be found here.
- Ratings agencies may have variable grades for the same company, so it’s highly recommended that you check various ratings to get a clear picture of a company’s standing.
- There is no fixed schedule for ratings announcements. Ratings can be changed on any day so just as you would check your own credit scores and reports at least once a year, it may be a good idea to review the health of your bank or insurance company on an annual basis.
- Know that financial companies are likely to highlight their best ratings and ignore or play down their lowest ratings. They’ll most likely present the most positive comments and testimonials from a rating agency’s reports, so take this into consideration when making evaluations.
- Be aware of the differences in ratings codes. For instance, an “A” from A.M. Best is the 3rd best rating, but it’s the 6th best rating for Fitch and S & P. The Street.com Weiss’ ratings have it at the 2nd tier. And note that a “B” rating doesn’t mean a company is above average, in fact, it means that it’s pretty much in trouble. A company is rated secure (good, strong, excellent) at the “A” level, while vulnerable standings correspond to B’s and below.
- A.M. Best is the most recognizable and most advertised ratings agency, but is known to be the most “lenient” with their scorecards. It’s therefore no surprise that most companies prefer to get their ratings from A.M. Best as these ratings tend to be the most positive. But really solid companies won’t have any qualms receiving their scores from all ratings bodies, and if they happily promote their standings, the more likely it is that they’re a reputable company you should consider working with.
- The FDIC issues ratings for banks which are not publicly released but are available through private ratings companies. Also, take note of FDIC insured limits: if you have more than the insured amount in savings, consider opening another account at a different bank to guarantee that your money remains insured. Plus, by diversifying your money across various banks, you’re spreading any kind of risk (minuscule though they may be) of financial loss due to the unlikely event of bank failure.