Credit Rating vs. Credit Score: An Overview
Credit scores are three-digit numbers that tell lenders whether an individual is likely a responsible borrower. Credit ratings, on the other hand, are letter ratings assigned to corporations or governments and are used by investors to determine their riskiness. Learn about the similarities and differences between credit scores and credit ratings, as well as how they are calculated and how they are used.
Key Takeaways
- Credit ratings are expressed as letter grades and used for businesses and governments.
- Credit scores are three-digit numbers used for 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 produced by credit rating agencies, such as S&P Global, Moody's Investor Service, or Fitch.
Credit Rating
When creating a credit rating, all agencies can set their own scales, but the ratings most popularly used are produced by . It uses AAA ratings for corporations or governments that have the strongest capacity for meeting financial commitments, followed by AA, A, BBB, BB, B, CCC, CC, C, and D for default. Pluses and minuses may be added to distinguish differences between ratings from AA to CCC.
To calculate these ratings, credit rating agencies like S&P Global, Fitch Ratings, and Moody’sreview a business’s or government’shistory of borrowing and repaying loans, including whether it has a history of missed payments, bankruptcies, or defaults. They will also review cash flows and debt levels.
You can improve your credit score over time by paying your bills on time, paying more than your monthly minimum payment on your credit card, and reducing your debt.
The agency also looks at the borrower's cash flows and current debt levels. If the organization has a steady income and the future looks bright, the credit rating will be higher. If there are any doubts about the borrower's economic outlook, their credit rating will fall.
The credit ratings agencies also assign outlook ratings—“negative,” “positive,” “stable,” and “developing”—to countries. Theseindicate the potential trend in a country’s rating over the next six months to two years.
Credit Score
Credit scores are expressed as a three-digit number. The most commonly used credit score in consumer lending decisionsis the FICO, or Fair Isaac Corporation, score.
To determine an individual's credit score, FICO takes several factors about an individual’s finances into account, including their payment history, credit mix, new credit accounts, credit utilization ratio, and length of credit history.
Another credit score for individuals is called the VantageScore, which is the same at all three credit bureaus, unlike the FICO score which can vary slightly. But most lenders use FICO scores when assessing the creditworthiness of a consumer.
FICO scores range from 300 to 850. A poor score is between 300 and 579, a fair score is from 580 to 669, a good score is from 670 to 739, a very good score is from 740 to 799, and an exceptional score is from 800 to 850.
The higher your score, the more likely you will be to qualify for loans and better the interest rates.
Key Differences
A credit rating is expressed as a letter grade and reflects the creditworthiness of a business or government. A numerical credit score, also an expression of creditworthiness, is used for individual consumers or small businesses. Credit ratings are provided by credit rating agencies, mainly S&P, Moody's, and Fitch, whereas your credit score primarily comes from FICO, and your creditworthiness is determined by three rating agencies: Experian, TransUnion, and Equifax.
When it comes to applying for a personal loan, mortgage, or new credit card, lenders will review your personal credit score to determine whether they will extend you credit and how much. When investors seek to purchase sovereign debt from a country or debt issued by a company, they will evaluate the credit rating as determined by the credit agencies.
Both ratings and scores are designed to show potential lenders and creditors a borrower’s likelihood of repaying a debt.They are created by independent third parties rather than by creditors or consumers.
How Do I Improve My Credit Score?
You can take several steps to improve your credit score. First, check your credit report for errors and make sure to correct any inaccuracies. Pay your bills on time, making at least the minimum payments. Aim to reduce your debt and have a healthy credit mix.
Does Checking Your Credit Report Affect Your Credit Score?
Checking your credit score and credit report will not have an impact on your credit score. This is considered a "soft inquiry." You are entitled to one free copy of your credit report from the major credit bureaus once per year, which you can get through AnnualCreditReport.com.
Does Opening New Credit Affect Your Credit Score?
When you open new credit, the lender will pull your credit history, which creates a "hard inquiry" that can negatively affect your credit score temporarily; however, if you use that credit responsibly, you can boost your credit score in the long term.
The Bottom Line
Although scales may vary, the most commonly used scales for credit scores consider borrowers ranked in the bottom third of the scale to be risky. Borrowers with FICO scores from 300 to 579, for example, are considered risky, while those with scores ranging from 580 to 850 are considered fair to excellent.
On the S&P credit rating scale, borrowers with ratings under BBB, in the bottom two-thirds of the scale, are considered “non-investment grade,” while those that fall between BBB and AAA on the scale are considered “investment grade.”
