When you start with credit, you get acquainted with plenty of new terms. But the two terms that perhaps get thrown around the most are credit rating and credit score. Ask your financial advisor what the difference between credit rating and credit score is, and they will tell you that both the terms show your creditors and lenders the borrower’s capacity to repay debt. In fact, you might need to show either of them when you apply for any form of credit, from a mortgage to a personal loan. This alone may lead you to believe both the terms are interchangeable. But that is far from true.
In this blog, we go into the details of the differences between credit rating and credit score, how they come into being, how each is calculated, and how you can optimize both.
Without further ado, let’s delve into the differences between credit rating and credit score.
Difference between credit score and credit rating
1. Credit score vs credit rating: What they are
In simple terms, credit agencies give credit ratings to corporations and even governments after assessing if they can meet their financial commitments. Thus, credit ratings indicate to lenders the entity’s loan repayment ability. Different credit agencies have slightly different methods for calculating credit ratings.
Credit scores, unlike credit ratings, are the individual’s loan repayment ability typically expressed in numbers. But just like credit ratings, different organizations offer credit scores to individuals based on their calculation methods.
If “what is the difference between credit score and credit rating” isn’t clear yet, perhaps the next point will come to your aid.
2. Credit score vs credit rating: How they are determined
Credit agencies like CRISIL, ICRA, Fitch, CARE and ONICRA give entities credit ratings based on their financial statements, borrowing and lending behaviour and credentials. They offer two types of credit ratings - speculative and investment-grade credit ratings.
Speculative credit ratings are offered to people or organizations making high-risk transactions. But investment grade credit ratings, on the other hand, are handed out to individuals making solid investments and are likely to repay the dues on time.
On the other hand, credit agencies determine credit scores after considering an individual’s credit history, new credit acquired, the mix of credit types, and more. Unlike credit ratings, credit scores are calculated the same way, no matter the type of investment. Only the nature of scoring depends on the credit agency calculating your credit score.
Thus, how the values for the credit score and credit rating are determined is one of the major differences between credit rating and credit score.
3. Credit rating vs credit score: What are the limits
Credit ratings are typically defined on a limited rating scale. In India, they are expressed in a letter-grade format. The highest rating is AAA, followed by AA, A, BBB, BB, B, all the way until D or default. Some credit agencies also add + or - to the ratings instead of repeating the letters. Naturally, the highest credit rating on a credit scale is AAA, while D is the lowest.
Credit scores, in contrast, are typically expressed numerically on a scale starting from 300 going all the way up to 900. The greater the numerical value, the higher the creditworthiness of the individual.
Looking for more differences between credit score and credit rating? Perhaps, the following pointer will help you with it.
4. Credit rating vs credit score: How to increase it
Whether you have a credit rating of C or a credit score of 500, you can increase them over time. The way to do it is by maintaining a good credit history and improving creditworthiness. Let us first see how you can boost your credit rating and increase your credit score individually.
Since the credit rating represents the creditworthiness of an entity, maintaining a stable credit history is a good way to increase it. So, pay off the business bills on time, lower your credit balance by paying off your debts, pay the business loan EMIs on time, and remember to keep your old business credit cards active to add to your credit history. Doing all of this will boost the credit rating over time.
Blurring the difference between credit score and credit rating further, increasing the credit score is similar to increasing credit rating. One can focus on maintaining good credit behaviour and expect their credit score to grow over time. Paying off unpaid credit card bills, keeping debts to a minimum, repaying outstanding loans on time, and checking the credit report periodically for errors, can all increase your credit score over time.
Criteria
Credit Rating
Credit Score
What they are
Denote the creditworthiness of entities like government institutions or businesses
Denote the creditworthiness of individuals
How they are determined
Determined based on financial statements, borrowing and lending behaviour and credentials
Determined based on the individual’s credit history, new credit acquired, the mix of credit types, etc.
Limits
AAA to D, where AA is the highest and D is the lowest credit rating
300 all the way up to 900, where 300 is the lowest and 900 is the highest credit score
How to increase them
Pay off the business bills on time, lower your credit balance by paying off your debts, pay the business loan EMIs on time, and remember to keep your old business credit cards active to add to your credit history
Paying off unpaid credit card bills, keeping debts to a minimum, repaying outstanding loans on time, and checking the credit report periodically for errors
Table: Difference between credit score and credit rating
Over to You
The above table should give a clear answer to the question - “what is the difference between credit score and credit rating”. Now that you know it, you can confidently keep track of your credit history and maintain a high credit rating or score.
If you’re looking to get a loan in the meanwhile for personal reasons, you can turn to Tata Capital. We offer personal loan at terms convenient to you. Visit our website to learn more.
16 September 2022
6 mins read
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