What is Credit Rating?

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 A credit rating can be defined as a process of analyzing the creditworthiness of different individuals, businesses, groups, non-profit organizations etc. For analyzing their financial risk to see whether or not these borrowers will be able to pay back their debt on time, special credit rating agencies are formulated. These agencies prepare a detail report that takes into consideration various elements such as ability to repay the debt, lending and borrowing history, debts taken in the past etc, to assemble this rating. A good credit rating initiated by the credit rating agencies indicates a good history of paying back debts on time, improves credibility, and also helps the banks and investors decide about whether or not to approve the loan application at a low rate of interest.

What is the importance of Credit Rating?

Credit Rating is an important factor in determining the creditworthiness of a borrower and a higher credit rating suggests that an organization or an individual is more likely to repay the borrowed debt, whereas on the other side, a lower credit rating will suggest that the borrower have a higher chance of turning into a defaulter. Therefore, in this situation lenders will view theses borrowers as of high-risk, and the borrower can find it difficult to get approval for the debts. Some other important features of credit rating are-

For Borrowers

1. Borrowing entities like individuals and organizations will be offered loans at a lower interest rates, if their credit rating is on a higher side.

2. The process of getting the applications of loans approved will be smooth and hazel free if companies will be having a higher credit rating.

For Lenders

1. Lenders can be assured that their debt will be paid back on time with the interest, when they are aware about good credit rating of the potential borrowers.

2. A good credit rating helps in determining the reliability that the potential investor and lenders can place on the organization so as to take sound investment decisions.

Difference between Credit Score & Credit Rating.

A credit score can be defined as a number, that is issued to the organizations or individuals so as to show their creditworthiness. Based on the person's credit information report, it is calculated by the credit agencies and it plays a very important role in determining whether or not a company is fit for credit cards or loans.

A credit rating can be defined as a factor which determines a creditworthiness of an individual or an organization and defines the probability of them defaulting on their payments of debts and interests.

What are the factors that affect Credit Rating?

The factors that can affect the credit rating of a company are-

1. The economic potential in the future of a company.

 Profits of an organization, level of change in performance of the company, efficiency and ability to pay the debt.

2. The financial history of a company.

History of past debts, payment of debt history, financial statements, and borrowing and lending history.

Check out the credit repair Guide for a deeper knowledge about the importance of credit rating.

Check out this credit app to report defaults and nonpayments.