What is a Bank Credit Rating?
Most people know that as a consumer, your personal credit rating can affect the rate you get on loans, whether or not you get a job, and if you can qualify to purchase a home.
But many people don’t know that banks also have credit ratings. Bank credit ratings are an estimate of how likely the bank is to default on its debts and go out of business.
Agencies such as Fitch Ratings, Moody’s Investors Service and Standard & Poor's issue credit ratings for banks (along with other financial institutions and investments). These ratings are normally given as letter grades with an AA or AAA rating being better than a BB or BBB rating, etc. An AAA or AA rating doesn’t guarantee a bank won’t default, it just means that default is extremely unlikely.
There is another rating called a noninvestment grade rating and those go to banks that are troubled. Another word for this rating is “junk” rating.
In general, it’s a good idea to stay away from banks with junk ratings. Even so, most consumers don’t need to worry about bank credit ratings – although there are a few exceptions which we’ll get into here.
Why Most Consumers Don’t Need to Worry About Bank Credit Ratings
The reality is that if your bank is insured by the FDIC you probably don’t have to worry about its credit rating. The FDIC is federal deposit insurance and it insures every bank deposit account up to $250,000 per depositor, per account.
There is similar insurance for accounts at credit unions called the NCUSIF, or National Credit Union Share Insurance Fund. If you do have more than $250,000 on deposit the easiest way to protect yourself is by splitting the money among different institutions to come under the $250,000 threshold.
As long as your money is FDIC insured, then if your bank goes under you will be protected and it doesn’t matter what the bank credit rating is or even if the bank is healthy. However, there are a few circumstances where you may want to pay closer attention.
How Home Equity and Business Lines of Credit Can Be Affected by Bad Bank Credit Ratings
If a bank’s creditworthiness goes into junk territory or even slumps for a while, then it’s possible that people who hold large open-ended loans could be affected. These include business lines of credit and home equity loans.
This is because when a bank is troubled it needs to improve its liquidity by preserving capital and may have to pull in its credit lines, so you may lose borrowing power. Sometimes troubled banks also will begin to close branches and lay off employees.
This won’t affect the safety of your deposits but can make an impact on your relationship with your bank if they close your local branch.
Bank Fraud vs. Bank Credit Ratings
Another thing to keep in mind is that bank credit ratings don’t reflect the likelihood of bank fraud. If your bank doesn’t have super tight security measures or has a bank account data security breach then your data may be at risk, even if your bank has a high credit rating.
It’s wise to take a look at digital security protocols when deciding on a bank. There is one more thing to be aware of when it comes to the credit rating of your bank.
Bank Credit Ratings Are Notoriously Inaccurate
One final thing to note is that bank credit ratings are notoriously inaccurate. Sometimes the information that these ratings are based on isn’t good and the projections are off.
It’s not wise to disregard bank credit ratings completely, but it’s also good to not view them as the only way to look at your banking institution. The one bank rating I would pay attention to is a junk rating. Usually, this means a bank is in a great deal of distress.
The Bottom Line on Bank Credit Ratings
Most people have deposits that are 100% guaranteed by FDIC insurance and therefore don’t need to worry about bank credit ratings very much if at all.
For consumers with lots of open-ended credit it might be a good idea to at least look at your bank’s credit rating, but keep in mind that it’s not the end all and be all of banking and that sometimes looking at the risk of data breach is just as important.