Credit ratings: What you need to know

Generally Kiwis’ savings are safe, however, as many of the collapsed finance companies have demonstrated you still need to be wary. But what do you need to know?

New Zealand credit ratings are a good place to start when you are researching an institution. There are a few different credit rating agencies, such as Standard and Poors, Fitch and Moody’s which list the ratings of a country. These ratings offer no guarantees, however they do provide you with an idea of an institution’s ability to meet its liabilities should conditions turn for the worse.

The ratings are based on the credit worthiness and financial stability of the bank or financial institution or their product, and range from AAA to D. An institution with adouble A (AA) rating is in a far better position to deal with a market downturn than one with a BB rating. However the recent global financial crisis has shown that even highly rated institutions such as Lehman Brothers which was rated at A+ in June 2008, subsequently failed in September 2010 due to extenuating circumstances.

In the rare event that one of New Zealand’s banks was to fail, it’s likely that the government could step in and take some action as it did when AMI Insurance looked like it was going to topple earlier this year and South Canterbury Finance got into financial trouble in 2010. Nevertheless, it’s sensible to spread your risks around to lessen the possibility of losing all your savings at once.

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