Deposits : Where do I go?

Mary Holm: Credit check can help lower your investment risk

24 Mar, 2018

Credit ratings are not like marks for a high school essay, where a B was pretty good. A credit rating of B means there’s a one-in-five chance the institution will default over five years.

READER QUESTION: I am constantly looking to find the best term-deposit rates when my savings, which are split between banks, mature.When I search www.depositrates.co.nz, I notice there are names unfamiliar to me included with all the banks on the list, such as Liberty, Flexi Cards, UDC and First Credit Union.How do these differ from the banks we are familiar with? Some of them offer slightly higher rates than the bank.

REPLY: The lesser known institutions are riskier. That doesn’t mean they will go out of business tomorrow, but let’s just say they are not as safe as the big banks. That’s why they usually offer higher interest. Otherwise, everyone would stick with the banks.

The best way of assessing an institution’s riskiness is to look at its credit rating. These ratings are issued by three big international agencies, S&P, Moody’s and Fitch.

S&P and Fitch’s ratings range from AAA (extremely strong), through AA, A, BBB, BB, B and so on, down to D (in default). Moody’s is similar, but it uses Aaa, Aa, A, Baa, Ba, B and so on, down to C (in default).

Sometimes a rating has a plus or minus sign after it. Look at the letters first. For example, AA- is better than A+.

As the Reserve Bank points out, credit ratings are not like marks for an essay in high school, where a B was pretty good.

A B credit rating means there’s a one in five chance the institution will default over five years. I wouldn’t take that on. It’s best to stick with “investment-grade” bonds or term deposits, which have a rating of BBB- or better.

The big four New Zealand banks — ANZ, ASB, BNZ and Westpac — all have an AA- rating.

Kiwi bank has A and TSB has A-.

Cooperative, Heartland and SBS all have BBB.

Some smaller institutions have no rating. Unless you know a lot about them, I suggest you give them a miss.

Posted by Alec Waugh March 24, 2018

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