A credit rating is a quantified evaluation of the creditworthiness of a borrower. A credit rating can be analyzed by anyone who wants to borrow money. Credit assessment and evaluation for companies and governments are done by a credit rating agency. These rating agencies are paid by the borrowers.
Relation between credit ratings and credit scores
Credit ratings belong to businesses and governments. Whereas, Credit score belongs only to individuals. Credit scores are derived from the credit history maintained by credit-reporting agencies.
A short-term credit rating predicts that a borrower will default within the year. This type of credit rating has become the norm. Also, Long-term credit ratings predict the borrower’s likelihood of defaulting at any given time in the future.
Importance of Credit Ratings
Credit ratings for borrowers are based on research conducted by the rating agencies. A credit rating reflects the borrower will be approved for a loan or not but also the interest rate at which the loan will need to be repaid. As companies depend on loans for many start-ups and other expenses. Credit rating should play a role in determining which lenders to apply to for a loan.
Factors Affecting Credit Ratings
Credit agencies focus on several factors when assigning a credit rating to an organization. The agency also observed the borrower’s future economic potential.
Frequently Asked Questions
What is the major Difference Between Credit Rating and Credit Score?
Credit ratings apply to businesses and governments. Credit score belongs only to individuals.
Why Are Credit Ratings Important?
Credit ratings, or credit scores, for borrowers, are based on research conducted by the rating agencies, they check the balanced and objective view of the borrower’s financial situation before approving any sort of loan.
What Does a Credit Rating Tell an Investor?
A short-term credit rating reflects the possibility that a borrower will default within the year. Whereas, Long-term credit ratings predict the borrower’s situation of defaulting at any given time in the extended future. A debt instrument with a rating below BB is considered that borrower is more likely to default on loans.