How Credit is Scored for, companies, and governments credit? letters are used to express the creditworthiness of an individual, or a company being assessed. Now, these credit ratings are usually given in letters like “AAA” or “BB”. For persons, credit scores are numbers that range from 850 to 300.
How Credit is Scored/Rated for Individuals, Companies, and Governments
Credit rating agencies are in charge of ratings that express whether debt obligations are met. The three credit rating agencies that create the world’s credit ratings are Fitch Ratings, Moody’s Investors Service, and Standard & Poor’s.
These three credit rating agencies give ratings and investment analyses, even though Fitch was the first to use the now common letter rating system. Here is how a typical credit rating scale is: AAA, AA, BBB, BB, B, CCC, CA, C, and D.
Pluses and minuses are added to letters AA through C in order to give ratings which also go with outlook ratings.
Symbolized by “NEG”, “POS”, “STA”, “RUR”, and “SD”, these connote positive, negative, stable, rating under review and selective default.
Now, these ratings are used by investors, who are trying to decide if they want to buy securities that are backed by any country. Know that only triple-A credit ratings are seen as top-notch. Ratings of BB or lower are seen to be “junk” ratings, and even though ratings between these two are OK, they are under observation by the credit rating agencies.
Consumer credit scores on the other hand are expressed in numbers instead of letters. Even though scores are generated by each of the three major credit reporting agencies. Which are Experian, Equifax, and TransUnion. The most commonly used consumer credit score is that which is created by Fair Isaac Corporation (FICO).
FICO scores range from 300 – 850. Scores above 800 are considered to be excellent. Credit scores that range from 740 – 799 are considered very good. While scores ranging from 670 –739 are considered good. Scores between 580 – 669 are seen as being below average or not good, while scores lower than 580 are considered risky or bad. What it implies when a borrower’s credit score reflects that he or she is risky, is that he or she has a higher likelihood of defaulting on a loan than a borrower who has an excellent credit score.
How a Credit Score is Calculated
Even though credit bureaus and lenders do not share the actual formulas they use in calculating credit scores, factors that may affect your credit score includes:
- Firstly, The duration you have had credit.
- Secondly, The duration for which each credit has been in your report.
- If a balance is carried on your credit cards.
- The regularity of missing payments.
- Amount of your outstanding debts.
- How close you are too, at, or above your credit limit.
- The number of recent credit applications.
- The type of credit you are using.
- Whether your debt has been sent to a collection agency.
- Lastly, Any record of insolvency or bankruptcy.
Finally, lenders still determine their own guidelines on the minimum credit score you need in order for them to lend you money.