Credit Score and Credit Rating – How Are They Linked?

If you have ever applied for an instant credit card, your bank must have checked your credit score before approval. But you may have also come across a similar term, credit rating. So, what is a credit rating? Is it the same as a credit score?

Lenders use credit score and credit rating interchangeably to convey the creditworthiness of an entity. Financial institutions use both measures to assess the credit risk of an individual or an organisation. A good credit score or rating signifies a low-risk debtor and assures lenders of their creditworthiness. Not to mention, using a credit card wisely is an excellent way to build your credit score.

So before you decide to get a credit card and apply online, it is best to understand your credit score.   Although the two terms convey the same information, there are some distinctions that you must keep in mind.

Difference Between Credit Score and Credit Rating

Here are some distinctions between credit score and credit rating:

1.      Entity

A credit score conveys the creditworthiness of an individual, while a credit rating describes the same for businesses or governments. So, banks will evaluate your creditworthiness using credit scores if you plan on getting a loan. Additionally, banks use your credit score to determine which loan or types of credit card you can apply for.

2.      Expression

A credit score is a three-digit number representing creditworthiness in the range of 300-900. The closer you are to the upper limit, the higher your creditworthiness is. On the other hand, credit rating is subjective and depends on the industry and rating agency.

Commonly, agencies use a letter grading to express the creditworthiness of businesses and governments.

Here is an example of credit ratings from Credit Rating Information Services of India Limited:

Here, AAA signifies the lowest credit risk, while D signifies a high risk of defaults.

3.  Issuing Agency

Several agencies issue credit ratings to corporations and governments. Credit Analysis and Research (CARE), CRISIL, and ICRA are some leading credit rating publishers in India. The credit ratings are backed by detailed reports that evaluate the solvency of an entity.

Companies registered under The Credit Information Companies (Regulation) Act, 2005 can provide credit scores in India. Most banks in India rely on CIBIL’s credit score when issuing credit to an individual.

4.  Calculation

To assess the default risk of a business or a government, rating agencies generally look at the following:

• Financial statements
• Annual reports
• News pieces
• Industry reports
• Future projections

Credit score, on the other hand, depends on your:

• Payment history
• Outstanding loan amount
• Length of Credit History
• New credit you apply for
• Types of credit you use

Before you opt for a credit card and apply online, you can request your credit score online by visiting CIBIL’s website.

Wrapping Up

Credit score and credit rating define the same thing but for different entities. Financial institutions use credit ratings to assess if they can lend money to a company or a government. In comparison, a credit score decides if an individual can apply for a loan or an instant credit card. So, if you are in the market for a credit card, make sure to pay your dues on time for a high credit score.