A credit rating is a way of measuring how likely someone is to pay back money they borrow. It applies to anyone who wants to borrow money, whether it’s an individual, a company, or a government. Credit bureaus like Experian, Equifax, and TransUnion calculate credit scores for individuals using a three-digit numerical scale. Credit rating agencies like S&P Global, Moody’s, and Fitch Ratings calculate credit ratings for companies and governments.
A high credit rating means the borrower is likely to pay back the loan without any problems, while a poor credit rating suggests the borrower might struggle to make their payments. Credit ratings not only determine whether a borrower is approved for a loan, but also the interest rate at which the loan will need to be repaid.
Credit scores for individuals range from 300 to 850 and are derived from the credit history maintained by credit-reporting agencies. Long-term credit ratings predict the borrower’s likelihood of defaulting at any given time in the extended future.
Credit ratings are important because they determine not only whether or not a borrower will be approved for a loan, but also the interest rate at which the loan will need to be repaid. Companies depend on loans for many startup and other expenses, so being denied a loan could be disastrous. A borrower’s credit rating should play a role in determining which lenders to apply to for a loan.
Credit ratings also play a big role in a potential investor’s decision as to purchase bonds. A poor credit rating is a risky investment because it indicates a larger probability that the company will be unable to make its bond payments.
Credit agencies consider several factors when rating a potential borrower, including the entity’s past history of borrowing and paying off debts, cash flows, current debt levels, income, and the market outlook for the borrower. Credit ratings are never static and can change all the time based on the newest data. It takes time to build up good credit, and it’s worth looking into the best credit monitoring services to ensure your information remains safe.
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