Who issues Credit Ratings or Credit Scores

What Is a Credit Rating?

Credit rating is an analysis of the credit risks associated with a financial instrument or a financial entity. It is a rating given to a particular entity based on the credentials and the extent to which the financial statements of the entity are sound, in terms of borrowing and lending that has been done in the past. It is in the form of a detailed report based on the financial history of borrowing or lending and credit worthiness of the entity/person obtained from the statements of its assets and liabilities with an aim to know their ability to repay debt on time.

It denotes the creditworthiness of a business or a company. It is issued by the credit rating agencies in India namely CRISIL, ICRA, CARE, SMERA, ONICRA and Fitch India. It is not used for individuals. On the other hand, credit scores are issued by the credit bureaus based on the credit information report. These scores are used by your creditors to evaluate your creditworthiness. Often these two terms are interchanged but they are not the same. Let's understand more about credit rating and credit score in detail.

Importance of Credit Rating for Borrowers-

Here are the benefits of credit rating-

  1. Easy Loan Approval:

    With a high credit rating, you will be viewed as a low-risk borrower. Therefore, banks will approve your loan application easily.

  2. Considerate Rate of Interest:

    Your credit rating is one of the most important factors that help lenders to determine the rate of interest on the loan you take. Higher the credit rating, lower the rate of interest.

Difference between Credit Rating and Credit Score-

The major differences between credit rating and credit score are given under-

  • A credit rating expresses the creditworthiness of a government or a business whereas a credit score is used to predict the likelihood that you'll pay your credit obligations on time.
  • A credit rating is expressed in a letter grade format such as Triple-A ratings for those governments or corporations that have a healthy capacity for meeting all financial commitments followed by a double-A, A, Triple-B, Double-B and so on, until D for default. Pluses and minuses can also be added to these ratings.
  • Credit scores are usually expressed in numbers on a scale of 300 to 900. The closer the score is to 900, higher is the creditworthiness of that individual.

Both scores are, however, provided by independent third parties.

How Do Credit Ratings Work in India?

Every credit rating agency follows its own algorithm to evaluate the credit rating. However, the major factors are credit history, credit type and duration, credit utilization ratio, credit exposure, etc. Every month, these credit rating agencies collect credit information from the lenders. This rating is used by banks, financial institutions and investors to decide on investing money, buying bonds or giving loan or credit card. The better is the rating, more are the chances of getting money at preferable interest rates.

What is a Credit Score?

A credit score is a 3-digit number that represents the borrower's ability to repay debts on time. This score is generated by a mathematical algorithm based on the information provided in the credit report and is designed to predict risk. The credit bureaus prepare your credit score based on the following information.

  • History of payments
  • Amount(s) that is owed
  • New credit
  • Types of credit that has been used
  • Length of credit history i.e., time since account activity was started

Though the score generated by each of the three bureaus may vary, but the factors taken into consideration are always the same.

Who Issues Credit Scores in India?

The Reserve Bank of India has provided authorization to companies that have registered under The Credit Information Companies (Regulation) Act, 2005 to provide credit scores or ratings based on the past performances that have been reported by numerous member credit institutions and banks. Credit scores are issued by the three major credit bureaus in India namely CIBIL, Experian and Equifax.

Credit ratings and Credit scores both are the terms that are used to determine the likelihood to repay debt. Though they both may sound similar and sometimes used interchangeably. But they both are different.

Credit ratings are for companies and credit scores are for the individual. Analysing both is important before availing any of the credit product to know your current standing.