Credit Rating

The term credit rating refers to a quantified assessment of a borrower’s creditworthiness in general terms or with respect to a particular debt or financial obligation. A credit rating can be assigned to any entity that seeks to borrow money—an individual, a corporation, a state or provincial authority, or a sovereign government.

Individual credit scores are calculated by credit bureaus such as Experian, Equifax, and TransUnion on a three-digit numerical scale using a form of Fair Isaac Corporation (FICO) credit scoring. Credit ratings for companies and governments are calculated by a credit rating agency such as S&P Global, Moody’s, or Fitch Ratings. These rating agencies are paid by the entity seeking a credit rating for itself or one of its debt issues.

A credit rating is a quantified assessment of the creditworthiness of a borrower in general terms or with respect to a financial obligation. Credit ratings determine whether a borrower is approved for credit as well as the interest rate at which it will be repaid.

A credit rating or score is assigned to any entity that wants to borrow money—an individual, a corporation, a state or provincial authority, or a sovereign government. Credit for individual consumers is rated on a numeric scale based on the FICO calculation by credit bureaus. A loan is a debt—essentially a promise, often contractual. A credit rating determines the likelihood that the borrower will be willing and able to pay back a loan within the confines of the agreement without defaulting.

A high credit rating indicates that a borrower is likely to repay the loan in its entirety without any issues, while a poor credit rating suggests that the borrower might struggle to make their payments. Just as an individual credit score is used to evaluate the creditworthiness of a single person, businesses also use credit ratings to demonstrate their creditworthiness to prospective lenders.

Credit ratings apply to businesses and governments as well as individuals. For example, sovereign credit ratings apply to national governments while corporate credit ratings apply solely to corporations. Credit scores, on the other hand, apply only to individuals. Credit scores are derived from the credit history maintained by credit-reporting agencies such as Equifax, Experian, and TransUnion. An individual’s credit score is reported as a number, generally ranging from 300 to 850.

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