Question 1

How are credit ratings different from credit scores?

Accepted Answer

A credit rating and a credit score are similar, but they're not exactly the same. Typically, credit ratings apply to big borrowers, like organizations, governments, and corporations. Credit scores, on the other hand, often apply to individual borrowers (though business credit scores exist as well). If you have a credit history, the major consumer credit bureaus likely receive information from your lenders about your account activity. Each credit bureau compiles that information into your credit report, which is the basis for your three-digit/letter credit score. Credit scoring models may vary slightly, but factors like your payment history, credit utilization, length of credit history, and credit mix typically influence your credit score. While credit ratings and credit scores aren't the same, you may notice some institutions using them interchangeably. A "personal credit rating" typically refers to your credit score.

Question 2

How are credit rating scores determined?

Accepted Answer

Each credit rating agency calculates credit ratings differently. But credit ratings often depend mostly on the borrower's financial history and experience managing debt. Some factors that may influence a credit rating include: Payment history: A borrower who has missed payments or defaulted on loans may not earn a strong credit rating. Current debt: The loans, credit cards, and lines of credit that a borrower already has may affect their creditworthiness and ability to manage more debt. Earnings and expenses: Cash flow may impact how a corporate borrower manages debts. A company that makes a lot of money but keeps expenses low, for example, may more easily avoid defaulting. Market conditions: Economic trends or changes within a particular sector may affect a borrower's ability to repay debts and their credit rating. Like credit scores, credit ratings aren't always an exact science. Even businesses with high credit ratings may default or face other financial stumbling blocks.

Question 3

What scales are used for credit ratings?

Accepted Answer

Every agency may use a slightly different credit rating scale. But many scales feature alphabetical rating symbols. For example, Fitch® ratings range from a "D," which means the entity in question has defaulted on their debt, to an "AAA," which means the entity in question has the lowest possible risk of defaulting on their debt. On the Fitch® Rating Scale and others, double or triple letters denote a higher credit rating. So, a BBB rating is higher than a BB rating, which is higher than a B rating.

Question 4

What is a good credit rating?

Accepted Answer

What qualifies as a "good" credit rating depends on the lender's or investor's priorities. The higher a company's or government's credit rating is, the safer it is as an investment. So, an investor looking for an investment opportunity with low credit risk may choose a business with a BBB score or higher. However, a wide range of priorities may influence investment decisions. Sometimes, an option with a lower credit rating may be a better fit for certain investors.

What Are Credit Ratings?

Key Takeaways

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