Credit Rating vs Credit Scoring: An Overview
A credit score is a three-digit number that tells lenders whether an individual is a responsible borrower. Credit ratings, on the other hand, are letter ratings given to companies or governments that investors use to determine their risk exposure. Learn the similarities and differences between credit scores and credit scores, and how to calculate and use them.
Main recipients
- Credit ratings are defined as letter grades and are used by businesses and governments.
- A credit score is a three-digit number used by individuals and some small businesses.
- Your credit score is based on information from the three major credit reporting agencies: Experian, TransUnion, and Equifax.
- FICO credit scores range from 300 to 850.
- Credit ratings are set by credit rating agencies such as S&P Global, Moody’s Investors Service or Fitch.
Credit Rating
All agencies can set their own criteria when developing credit ratings, but the most commonly used ratings are those developed by S&P Global. It uses AAA ratings by default to represent companies or governments with the greatest ability to meet their financial obligations, followed by AA, A, BBB, BB, B, CCC, CC, C, and D. Plus and minus signs can be added to differentiate grades from AA to CCC.
To calculate these ratings, credit rating agencies such as S&P Global, Fitch Ratings and Moody’s evaluate the borrowing and repayment history of a business or government loan, including whether there is a history of missed payments, losses or defaults. They also assess cash flow and debt levels.
You can improve your credit score over time by paying your bills on time, paying more than the minimum monthly payment on your credit cards, and reducing your debt.
The agency looks at the borrower’s cash flow and current debt levels. If the company has stable revenues and a bright future, the credit rating will be higher. If there are doubts about the borrower’s financial prospects, their credit rating will be lowered.
Credit rating agencies assign outlook ratings to countries – “negative,” “positive,” “stable” and “growth.” These ratings indicate the likely trend of a country’s ratings over the next six months and two years.
Credit score
Credit scores are expressed as three digits. The most commonly used credit score in consumer credit decisions is the FICO or Fair Isaac Corporation score.
To determine an individual’s credit score, FICO considers many factors about an individual’s financial situation, including payment history, credit mix, new credit accounts, credit utilization, and length of credit history.
Another standard for personal credit scores is the VantageScore, which is the same for all three credit bureaus and may differ slightly from the FICO score. However, most lenders use the FICO score when evaluating a consumer’s creditworthiness.
FICO scores range from 300 to 850. Poor scores are 300 to 579, fair scores are 580 to 669, good scores are 670 to 739, very good scores are 740 to 799, and excellent scores are 800 to 850.
The higher your score, the more likely you are to qualify for a loan, and at a more favorable interest rate.
Main Differences
A credit rating is defined as a letter grade that reflects the creditworthiness of a business or government. Numeric credit scores, also known as statements of credit worthiness, are used for individual consumers or small businesses. Credit ratings are provided by credit rating agencies, primarily Standard & Poor’s, Moody’s and Fitch. Your credit score comes primarily from FICO. Your creditworthiness is determined by three rating agencies: Experian, TransUnion and Equifax.
When you apply for a personal loan, mortgage or new credit card, the lender assesses your personal credit score to determine your credit limit and the term that can be extended. When an investor wants to buy debt issued by a country or company, the credit rating is assessed by a credit bureau.
Both ratings and scores are designed to show the likelihood that borrowers and lenders will repay their debts. They are not created by lenders or consumers but by an independent third party.
How do I improve my credit score?
There are many ways to improve your credit score. First, check your credit report for errors and make sure they are corrected. Pay your bills on time and at least make the minimum payments. Work to reduce your debt and have a healthy credit portfolio.
Does checking your credit report affect your credit score?
Reviewing your credit score and credit report will not affect your credit score. This is considered a “soft issue.” You are entitled to one free credit report from the major credit bureaus each year, which you can get at AnnualCreditReport.com.
Does opening a new credit account affect your credit score?
When you open new credit, the lender pulls your credit history, making a “hard inquiry,” which can temporarily negatively impact your credit score. However, if you use your credit responsibly, your credit score can improve in the long run.
in conclusion
While scores vary, the most commonly used credit scoring scale considers borrowers in the bottom third to be the riskiest. For example, borrowers with FICO scores of 300 to 579 are considered high risk, while borrowers with FICO scores of 580 to 850 are considered fair and good.
In Standard & Poor’s credit ratings, borrowers rated below BBB (two-thirds of the rating range) are considered “non-investment grade”, while borrowers rated between BBB and AAA are called “investment grade”.
