Credit rating
Credit rating is a qualified assessment and formal evaluation based on detailed financial analysis by a credit bureau regarding one’s financial history, specifically relating to a person’s ability to repay debt obligations. It also measures the probability of the borrower’s default and his or her ability to repay the loan fully and on a timely manner. The main reason credit bureaus provide credit rating is to help investors have comparable information regarding credit risk based on standard rating scale, notwithstanding specifics of companies, separate sector of the economy and country.
Credit rating has proven to be effective instrument in assessing risk in countries that have more advanced economy since it exposes transparency of an enterprise. Credit rating shows financial, legal and organizational sides of a person or companies. All these qualities characterize borrowers’ ability and willingness to repay their loan obligations in full.
In many jurisdictions, credit rating can be given to individuals, sovereign governments, corporations, regional and local executive bodies, and financial organizations. Investment companies often use credit rating as one of the ways to assess their clients’ ability to qualify for a loan.
In general, international rating agencies assign two types of rating: short-term and long-term. What short-term rating does is it gives the benchmark of the probability that a borrower going into default within one year. On the other hand, long-term rating evaluate the possibility of borrower’ default over a longer period of time. The period can be up to the lifetime of the securities issued. All credit ratings are constantly monitored and revised by rating agencies. Depending on the results, the agency can downgrade, upgrade, or confirm credit rating that was previously assigned.
For personal credit rating in the United States, individuals are assigned a credit score by credit bureaus. This is a 3-digit number called the FICO credit score. A person’s credit score coupled with the credit report affect his or her ability to borrow money through lending institutions like banks and credit cards.
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