Are you or your company creditworthy?. Often times, individuals or companies seek to acquire credit, when this happens, they are assessed by the quality of their credits. Here, let me bring you a detailed description of the term credits quality and how important it is.
What is Credits Quality?
Simply put, is the ability to repay debt. It is a measure of an individual or company’s creditworthiness.
It is a bond issuer’s ability to repay interest and principal in a timely fashion. Credit quality is depicted with a letter by rating agencies as AAA, AA, and so on. This means that the lower the rating, the higher the probability of default.
The reason is to measure any default, especially by a bond issuer. Credit rating agencies determine it. This is done to provide bond ratings, they may change these from time to time. The CQ of individuals is measured using FICO scores.
How Does It Work?
This is measured with the aid of a FICO score. The FICO score is designed and calculated by Fair Isaac Corporation. It is a summary of the information on a credit report. Bond ratings are measures of the credit quality of companies that issue bonds. These ratings can also be assigned to insurance companies or other entities or securities to indicate the level of risk.
FICO score comes in a range of 300 – 850. Now the higher a person’s score, the more creditworthy the individual is. The best interest rates are given to borrowers with FICO scores above 740, although this is a generalization. So many factors are considered by the FICO score algorithm in determining credit quality. They include payment history, the amount owed, the length of the person’s credit history, the amount of borrowing capacity as well as the types of debt used by the borrower. The three major credit bureaus include Experian, TransUnion, and Equifax. Each of these credit bureaus collects information about a person’s credit quality. Thus, a person can have three different measures of credit quality.
How Important is Credit Quality?
This greatly impacts the amount of credit for which an individual or business gets approved. It also determines the interest rate he or she is required to pay for that credit.
It also influences the price and demand for certain bonds. This is because, the lower the CQ, the riskier the investment, and the less the investment is worth. Owing to this, downgrades (or rumors of downgrades) in an issuer’s credit rating can have a significant impact on its bonds and on the market or industry.
On the whole, an individual or a company can improve its credit quality. This can be done by making on-time bills payment, getting current and staying current on bills, keeping low debt balances, avoiding unnecessary credit, not opening lots of new credit accounts at a young age, making judicious use of credit accounts, and regularly checking one’s credit report for errors.