Credit Rating

What is credit rating?

Credit rating is an evaluation of the worthiness of debtor to get credit. Credit rating is done by a credit rating agency which assesses an individual’s or company’s ability to get a loan and successfully pay it back without a chance of defaulting. An individual or business with a poor credit rating indicates that the person or business carries a high risk factor and if given credit there is a high chance they will default their payments. Credit ratings can also be done on a national level and this is called sovereign credit rating. Sovereign credit rating assesses national governments and is used to determine risks of investing in a country. This kind of credit rating also put political impact into consideration. Thus countries that have poor credit ratings are considered to be risky to invest in. Credit rating can be done in two ways and that is short term and long term credit rating. Short term credit rating assesses an individual’s possibility of defaulting loan payments within a year while long term credit rating is calculated over a longer time frame.

What is a Credit Bureau?

A credit bureau also called consumer reporting agency in the U.S. is an organization that collects information from various sources and provides credit information of individuals and businesses. A credit bureau provides information on people’s borrowing and credit payment tendencies. This information is accessed by lenders to assess the probability of a borrower defaulting their loan payment. Employers may also request credit information of an individual to evaluate their suitability for a position in a business. A person wanting to lease a property may request credit information for the individual or business they intend to lease the property to so as to assess the risk factors involved.

NO SUCH THING as a Credit blacklist

When an individual has problems paying back loans their credit score is affected negatively. If such individuals continue to default loan payments some credit providers may black list them. The credit bureau keeps all this information such that being blacklisted for credit affects your loans applications. Although credit blacklisting does exist it doesn’t mean you won’t be able to get credit. In actual fact we can safely say there is no such thing as credit blacklist for even if you have been listed for bad credit you can still secure some good loans. Certainly when you have been blacklisted it becomes difficult to secure conventional unsecured loans. This is so because you will be a high risk debtor. On the other hand however there are loans that are specially made for people that have poor credit ratings and have been blacklisted by other credit providers. The difference is that bad credit loans have higher interest rates as compared to conventional loans. Thus credit providers are able to offer blacklisted debtors loans that have relatively higher interest rates so as to cover for the high risk involved in loaning money to blacklisted debtors. So even if you have been blacklisted it is still possible for you to get a loan, so credit blacklist is nothing as long as you know where to get loans for people with bad credit.

How a score is calculated

In the U.S. credit scores are based on statistical analysis of credit files with the intention of determining the creditworthiness of a debtor. Credit scores are based on the information derived from credit reports. Calculations of credit scores don’t consider an individual’s income. Different methods have been devised to calculate credit scores. The most common calculation method for credit scores is FICO, this is a calculation method that was developed by Fair Isaac Corporation. This score calculation method considers the risks and possibilities of a borrower defaulting their mortgage or financial obligations.

Newer methods for calculating credit scores now exist and these are being used by companies like Scorelogix and PRBC. These companies don’t use information from the credit bureau to score individuals. These companies calculate an individual’s credit score by assessing stability of their job, income sufficiency and economical impact so as to come up with risk factors that may affect an individual’s ability to pay back a loan. The new credit score calculations can be used in conjunction with the method designed by FICO to come up with much accurate credit scores that clearly show the risk of lending an individual money.

Credit scoring and rating categories

Credit scoring and rating agencies rate individuals and place them in rating categories that range from AAA to D.

AAA is the highest credit rating category assigned by Standard & Poor’s. An individual or business with this rating is extremely capable of meeting all their financial commitments. Individuals with AA rating are not very different from the AAA group there is just a slight risk. AA+ have a very low credit risk but are susceptible to long term risks. An individual rated A has a strong capacity to meet his/her financial obligations although he/she is susceptible to changes in economic changes. BBB category has individuals that have the capacity to meet all their financial obligations however if the economy changes negatively they are likely to falter their payments. Individuals rated BB are highly vulnerable to economical changes and uncertainties expose them and may make them become doubtful for credit. Individual rated B are capable of meeting all their credit obligations however they are at a high risk of being affected by economical changes which may force them to default their financial obligations. Individual in the CCC category lie in the vulnerable category and their ability to meet their financial obligations depends of economic conditions and conditions that favor business. Individuals rated CC are highly vulnerable. Individuals rated C are highly vulnerable and may be facing bankruptcy but are still managing to pay out some of their financial obligations. Individuals rated R are currently under supervision by regulators who control paying out of their financial obligations. SD individuals have defaulted on some but not all their financial obligations. D rated individuals have defaulted on all their financial obligations and are likely to default in future. NR individuals are not rated.

What is credit rating?