Credit ratings and credit scores are both tools used to assess the creditworthiness of borrowers, but they are different in several ways.
Credit rating refers to an evaluation of the creditworthiness of a borrower or an issuer of debt securities such as bonds or commercial paper. It is conducted by credit rating agencies (CRAs), which assign a rating to the borrower based on various factors such as financial position, credit history, and industry outlook. Credit ratings are usually expressed in letter grades such as AAA, AA+, BB-, etc., with higher ratings indicating lower credit risk and vice versa. Credit ratings are typically used by investors to evaluate the creditworthiness of potential investments.
Credit scoring, on the other hand, is a statistical method used to evaluate the creditworthiness of individual borrowers. It is conducted by credit information companies (CICs), which collect and maintain credit information on borrowers, including their credit history and current credit obligations. Based on this information, a credit score is calculated, which is a numerical value between 300 and 900. The higher the score, the lower the risk of default, and vice versa. Credit scores are typically used by lenders to assess the creditworthiness of individual borrowers and to make decisions on whether to approve credit applications and at what interest rate.
Some of the key differences between credit ratings and credit scores are:
- Purpose: Credit ratings are used to assess the creditworthiness of issuers of debt securities, while credit scores are used to assess the creditworthiness of individual borrowers.
- Agency: Credit ratings are assigned by credit rating agencies (CRAs), while credit scores are calculated by credit information companies (CICs).
- Scale: Credit ratings are expressed in letter grades, while credit scores are expressed as numerical values.
- Scope: Credit ratings take into account the creditworthiness of the issuer as a whole, including factors such as financial position, industry outlook, and management quality. Credit scores, on the other hand, focus on the credit history and current credit obligations of individual borrowers.
In summary, while both credit ratings and credit scores are used to assess creditworthiness, they differ in terms of their purpose, agency, scale, and scope.