The different types of credit rating

The different types of credit rating

This is the evaluation of the credit risk presented by a prospective debtor. It is used to predict their ability to pay the debt back. It is essentially a representation of evaluation by agencies that collect this type of information on individuals and business entities. 

It’s the numeric representation of this information is in the form of a credit score, which can be regarded as an evaluation of creditworthiness. 

Understanding the different types of credit rating can provide better insight into the process. Corporate credit ratings are assigned by credit rating agencies such as Moody’s, Standard & Poor and Fitch Ratings. Designations such as A, B, C indicate a probability of default. If a country or organisation has a negative rating, then investors will be less likely to want to put money into it. A positive rating on the other hand, will lead to more favourable for investment opportunities. 

Sovereign credit ratings on the other hand, are designed for a sovereign entity, like a national government. These consider economic risks and those that have to do with politics, payment default risk for exporters and country risk.  

For individuals, credit rating status is determined by credit bureaus. These institutions collect data about credit behaviour of individuals and provide insight in the form of reports. The credit rating is used as a form of summary of these details. 

The higher the credit rating, the better it is for individuals as well as the lender in question. This means that they have handled their credit well and that they are likely to be reliable and trustworthy. 

There are various ways in which the different types of credit rating can be improved and a prudent borrower will do what it takes to have an exceptional credit rating, which improves their chances for approval.

Categories: Financial tips