What Is the Difference Between Credit Rating and Credit Score?
When you do your research about a loan or approach a lender to submit your application for a new credit, you may come across various new terms or jargon. However, the two terms that are often discussed are credit score and credit rating.
If you ask any financial expert about the difference between credit scores and credit ratings, they will tell you that both terms indicate to lenders the borrower’s repayment capacity. In fact, as a borrower, when you apply for any kind of loan, you must demonstrate to lenders that you have a high credit score and a solid credit history.
And this alone may lead you to believe that both terms are the same, and you can use them interchangeably. However, both terms are entirely different financial concepts and serve different purposes.
In this guide, we provide a comprehensive comparison of credit ratings and credit scores to help you understand the difference between the two.
Credit rating vs credit score – what are they?
Credit rating is essentially a measure used by financial organizations and lenders to evaluate the creditworthiness of business entities and governments. You can think of it as a report card for business organizations, offering an overview of their financial health, stability, and ability to repay loans.
Credit agencies, or credit bureaus, provide credit ratings to business corporations and government entities after assessing their various financial information. Different credit bureaus also use different methods to calculate these credit ratings.
One of the key differences between credit ratings and credit scores is that the latter focuses on an individual’s ability to repay a loan. Furthermore, it is expressed in numerical terms.
Credit rating vs credit score – how are they calculated?
Now that you know what a credit rating and a credit score is, let's see how they are determined.
Credit bureaus, such as CRIF, determine the credit ratings of businesses based on their reputation, borrowing patterns, behaviour, and financial statements. There are two types of credit ratings: speculative and investment-grade.
Speculative credit ratings are assigned to businesses that make high-risk transactions. Investment-grade credit ratings are awarded to individuals who make solid investments and are highly likely to repay their debts on time.
Credit bureaus determine an individual's credit score based on several factors, including credit utilisation ratio, credit mix, repayment history, and credit behaviour.
Credit Rating vs. Credit Score – How Are They Expressed?
Credit ratings are expressed in letter-grade format. The highest credit rating is AAA, followed by AA, A, BBB, BB, B, and the pattern continues all the way till D or Default. Some of the credit bureaus add a + or – sign to the ratings instead of repeating the letters.
In contrast, a credit score is expressed numerically, and it ranges from 300 to 900. Naturally, the higher your credit score, the closer it is to 900, the higher your creditworthiness. When applying for a loan, it is advisable to check your credit score beforehand so that you can determine the minimum credit score required by different financial institutions and choose a lender accordingly.
Credit Rating vs. Credit Score – How to Improve It?
If you are looking for tips on how to improve your credit score or credit rating, it's essential to know that there are no shortcuts to achieving this goal. You can increase your credit rating and credit score over time.
Since a credit rating reflects the creditworthiness of a business entity, a business can improve its credit rating by maintaining a stable credit history. Additionally, they must pay off all bills and loan EMIs on time, maintain a low credit utilisation ratio, and keep their old business credit card account active, which can contribute to their credit history. Doing all these may boost their credit rating over time.
Today, there are many online services that allow business entities to do a credit rating check for free, enabling them to be updated with their latest credit rating and make informed financial decisions.
To increase your credit score, you must maintain good credit behaviour, i.e., pay off credit card bills on time, avoid applying for too many loans at once, keep the credit utilisation ratio below 30%, and periodically check your credit report for errors. All these may help increase your credit score.
Let's take a quick relook at the differences between credit rating and credit score with the help of the following table
| Credit Rating | Credit Score |
|---|---|
| It denotes the business entities’ and government institutions’ creditworthiness | It denotes the business entities’ and government institutions’ creditworthiness It denotes the creditworthiness of individuals |
| It is determined based on financial statements, and the business’s borrowing behaviour | It is determined based on your credit behaviour, number of credits acquired, credit mix, etc. |
| It is expressed in letter format, i.e., from AAA to D, where AAA is the highest credit rating and D is the lowest rating | It is expressed in number format, ranging from 300 to 900. With 900 being the highest score and 300 the lowest score |
| Businesses can improve their credit rating by paying their bills on time, keeping the credit balance low, and having a long credit history | You can improve your credit score by paying off the bills on time, avoiding taking too many loans at the same time, and maintaining a good credit mix |
Conclusion
Understanding the nuances and differences between credit score and credit rating can empower you to make informed financial decisions. The credit ratings and credit score are not just random figures or letters, but they reflect your financial behaviour and creditworthiness.
Being responsible with your finances and maintaining good credit behaviour, like checking the credit report correctly, making on-time payments, etc., can help you and the business entities improve the credit score and credit ratings, respectively.
Remember, maintaining good financial health is not a destination, but rather a continuous journey. Every step you take towards improving your credit rating and credit score will help shape a financially bright future.
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