Two terms often associated with debt are credit rating and credit score. Some people may use both of these terms interchangeably. However, both have some differences and relate to different entities.
What is a Credit Rating?
Credit rating is an assessment of a borrower's creditworthiness in general terms or with respect to a particular debt or financial obligation. Credit rating is usually applicable for businesses or government bodies and expressed as a grade. Some authorities require entities to get a credit rating for their debt instruments or when borrowing money.
There are no set standards for credit ratings. Most credit rating agencies use their own levels for credit ratings. However, some may use the S&P Global scale. This scale uses AAA ratings for corporations or governments. The AAA credit rating is the highest rating that an entity can receive. After that, entities can receive an AA, A, BBB, BB, B, CCC, CC, C, or D for credit rating. The D credit rating signifies default.
Credit rating agencies look at an entity's loan borrowing and repaying history to gauge a credit rating. Therefore, entities with a history of timely payments and no defaults will receive a better score and vice versa. An entity's credit rating can play a significant role in securing loans and obtaining favourable repayment terms.
What is a Credit Score?
A credit score is also a measure of creditworthiness. However, it is most relevant for individual consumers and small businesses and usually expressed in numbers. Higher credit scores indicate better creditworthiness, while a lower number shows the opposites. There are various factors that play a role in determining an entity's credit score.
Credit scores range between 300-850. The higher the number, the better it is for the borrower. Usually, a credit score of 700 or above is considered a safe investment for lenders. However, lenders may break down the score into several categories to determine the terms they demand from borrowers. The range and categorization depend on the lender.
Like the credit rating, the credit score also indicates an entity's historical performance, particularly its credit history. Therefore, the score looks at an entity's level of debt, repayment history, number of facilities currently in use, and other factors. Like the credit rating, an entity's credit score also plays a significant role in securing loans.
What are the differences between Credit Rating and Credit Score?
There are some differences between credit ratings and credit scores. These are as below.
Source
Credit ratings come from rating agencies, such as Standard & Poor's, Moody, and Fitch Group. On the other hand, credit scores come from credit reporting agencies, such as Equifax, Experian, and TransUnion.
Scale
Credit ratings use the S&P scale, although it is not a requirement. Therefore, the rating scale may differ according to the agency. Credit score uses the FICO scale and is constant for all agencies. However, an entity's score may vary from each source.
Uses
Credit ratings are mostly applicable to businesses and governments. It looks at an entity's history of borrowing and repaying loans. Credit scores are relevant to consumers. They look at things such as an entity's payment history, current debt amount and facilities used, credit history, etc.
Conclusion
Credit rating and credit score are two scales used to determine an entity's creditworthiness. Both of them are crucial in determining if an entity can obtain a loan and what terms they get. However, they are both different in their source, scale, and uses.
Originally Published Here: Credit Rating vs Credit Score
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