Credit Rating vs Credit Score: Know the Difference
When you go to apply for your first credit application or loans and credit cards, you will be bombarded with financial jargon. The most well-known of these is the CIBIL score. You will come across this term quite often, whether you are submitting a new credit application or intend to obtain a large debt in the future. Many people use the terms credit rating and credit score interchangeably without understanding the difference. This article will help you know the difference between credit score vs credit rating 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 typically determined by leading credit agencies that operate under the purview of the Securities and Exchange Board of India (SEBI). The four noted rating agencies in India are.
1. 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.
2. 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.
3. 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.
4. 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 credit rating scale ranging from "AAA" to "D." This main difference highlights how a rating informs lenders of the risk of lending while also guiding investors on 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?
1. 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.
2. 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.
Also Read: 5 Brilliant Ways to Avail a Personal Loan with a Low Credit Score
Who Assigns a Credit Score to Individuals?
1. CIBIL
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.
2. 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.
3. 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.
4. 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?
| 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. |
What Is the Difference Between a Credit Score and a Credit Rating?
Now that you have a basic understanding of credit scores in India and credit ratings, it is time to look at the difference between credit score and credit rating in a table format.
| Parameters | Credit Rating | Credit Score |
|---|---|---|
| Meaning | It informs lenders and the general public about a company's or government entity's creditworthiness. | It provides the lender with information about the individual's credit behaviour. |
| Influencing Factors | Credit rating agencies base their decisions on a company's financial statements, borrowing habits, and repayment history. | The credit score is determined by factors such as credit mix, recent loan acquisition, credit utilisation rate, debt settlement cases, and so on. |
| Who Decides? | Credit rating is decided by agencies such as CRISIL, ICRA, CARE, etc. | A credit score is decided by the CIBIL, Experian, CRIF High Mark, and Equifax. |
| Range | AAA to D | 300 to 900 |
| How to Improve? | - Pay off your business debts on time. - Avoid closing older business credit cards even if you don't use them often. | - Automate your EMI payments. - Try to have a credit portfolio that is a mix of secured and unsecured loans. - Follow the <30% credit card utilisation rule. |
Also Read: How To Improve Your Credit Score After A Loan Settlement?
To Conclude
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.