When you go to apply for your first loan, you will be bombarded with financial jargon. The most well-known of these is the credit score. You will come across this term quite often, whether you are submitting a new loan application or intend to obtain a large debt in the future. Many people use the terms credit score and credit rating interchangeably without understanding what they mean. This article will help you understand credit rating vs credit score in depth.
What is a credit rating?
A credit rating is a process of determining the credibility of a business entity, such as a sole proprietorship, a partnership firm, a non-profit organisation (NGO), a limited company, and so on. Credit rating agencies evaluate the company's financial documents, sales figures, past and present debts, and earning potential to determine the risk involved in lending funds to a business. A good credit rating means the company has stable financial and strong repayment potential.
Who assigns a credit rating to businesses?
Credit ratings are determined by credit agencies that operate under the purview of the Securities and Exchange Board of India (SEBI). The four noted rating agencies in India are –
CRISIL
CRISIL stands for Credit Rating Information Services of India Limited. It was India's first rating agency, founded in 1987. This company has operations in Hong Kong, the United States, China, Poland, the United Kingdom, and Argentina. CRISIL assigns ratings to banks and companies based on their market share, management experience, company strength, and other factors.
CARE
CARE is an acronym for Credit Analysis and Research Limited. It was founded in 1993 and provides a wide range of services, such as credit rating, corporate governance, and recovery. CARE's rating service is divided into two categories: long-term and short-term debt ratings.
ICRA
The Investment Information and Credit Rating Agency of India (ICRA) is well-known for providing rating services for various financial products such as mutual funds, corporate debt, bank loans, and so on. ICRA was established in 1991 and is headquartered in Gurgaon.
India Ratings & Research
India Ratings & Research was earlier known as Fitch Ratings India Pvt. Ltd was incorporated in 1995. This rating agency determines the credibility of financial institutions, urban local bodies, corporate bond issuers, and managed funds.
What does a different credit rating mean?
Companies are rated by credit rating agencies on a scale of "AAA" to "D." It will assist lenders in understanding the risk of lending while also informing investors as to whether the debt instrument is suitable for long-term or short-term goals.
Symbol
Rating Scale
Credit Risk
AAA
Excellent
Lowest
AA
Very good
Very low
A
Good
Low credit
BBB
Average
Moderate credit
B
Low
High credit
C
Poor
Very high
D
Defaulted
Default
What are the different types of credit ratings?
The above symbols used by rating agencies are further classified into two grades, as explained below.
Investment grade
It denotes that the borrowing company has a strong financial position and that investing in bonds or other debt instruments issued by them will yield a profit. Investment-grade debt typically provides a low rate of return on investment.
Speculative grade
Companies with speculative grades tend to have poor financial or business models and investing in their bonds carries a high risk. However, speculative-grade companies provide a higher rate of return on investment.
What is a credit score?
A credit score is a three-digit numerical expression that provides lenders with information about an individual's creditworthiness. The credit bureau agency determines the credit score. It is determined by analysing previous and current debt repayment patterns, the number of hard inquiries, the credit utilisation rate from revolving loan products, and loan settlement cases.
CIBIL, also known as TransUnion Credit Information Bureau Limited, provides credit information on individuals and businesses. CIBIL was established in the year 2000 and received its operational licence in 2010. This credit bureau rates your credit behaviour on a scale of 300 to 850.
Equifax
Equifax received its official rating agency licence in 2010. It ranks individual credit behaviour on a scale of 1 to 999. This credit bureau not only assigns credit scores but also provides industry diagnosis, credit fraud, risk management, and portfolio management reports to large corporations.
Experian
Experian received its licence to operate as a credit bureau in India in 2010. It offers comprehensive credit reports for both businesses and individuals. The score assigned ranges between 300 and 900.
CRIF High Mark
CRIF is India's only credit bureau that has been approved by the RBI to operate. It was granted a licence in 2010 and rates businesses and individuals on a scale of 300 to 850.
What does a different credit score mean?
To understand the score of 300-850, go through the following table.
Score
Creditworthiness
Meaning
NA
Not applicable
You have yet to apply for your first loan
300-549
Poor
You have a history of skipping EMIs and defaults. The lender will not approve a loan with this score.
550-649
Fair
It means you made several irregular EMI payments and had multiple hard enquiries on your profile. A credit score in this range may lead to loan rejection.
650-749
Good
It means you have demonstrated good credit behaviour in the past, but there are still a few flaws that could prevent you from getting low-interest loans.
750-799
Very good
It means you made on-time EMI payments and have a solid credit history. With this score, your lender considers you a low-risk borrower and may offer you a favourable rate on your application.
800-900
Excellent
This score demonstrates that you are exceptionally good at managing your finances and have never missed a debt repayment. The lender will grant you a larger loan with lower interest rates and a favourable repayment period.
Credit score and credit rating both provide information about creditworthiness. The credit score offers detailed insight into an individual's credibility and repayment potential by assessing the total number of new credits, previous and current EMI payment patterns, and credit utilisation rate. On the other hand, credit rating informs about the credibility of businesses trying to borrow funds from the public through bonds.
Katyaini is a finance expert with a focus on the non-banking financial sector, bringing over 8 years of experience in NBFC. She specializes in simplifying complex financial concepts for readers, helping them navigate the NBFC landscape. Outside of work, she is passionate about travelling.
