Credit Rating and Credit Score Conceptual Review Essay

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Introduction

This paper will discuss credit rating, credit score and credit rating agency. A credit score is a numerical value calculated by the lenders to measure one’s creditworthiness. It is based on an arithmetical examination of borrowers’ credit files. With this numerical value, any financial institution can determine who qualifies for a loan and who will assist the bank to earn a lot of revenue (Sheffrin, 2003). This means that the lending institution has the power to alter the scores without asking permission from any other governing body. Credit rating on the other hand is a way of estimating if a borrower is worthy to be given credit, a firm or even a country. It is calculated using current assets, liabilities, and financial history. Credit rating tells the institution lending finances or investor whether the borrower can repay the loan. Finally, a credit rating agency can be defined as a business or a company that assign credit ratings to insurers of certain kinds of debts commitments and debt tools. Many are times that you will find that the issuers of securities are local governments, countries and even public or private companies. What is taken into consideration by the credit rating for an insurer is the ability to repay the loan.

Discussion

The consumer must be aware of the credit score. This may be of great importance especially when the economic climate is in the decline and job loss increasing. According to FICO which is a corporation that is publicly traded and that came up with the best and widely used credit score, the credit score available to the clients is not the same as that one given to lenders but the lenders have the power to change the score as they so wish and this is determined by the risk factors of the client or the borrower (Jonathan, 2007). The reality is that since the lending party has the power to cancel credit lines or lower the credit lines of the consumer without being prosecuted the client’s credit score can rapidly go down to almost 40 points and this automatically puts the consumer at a disadvantage. Though the FICO model exists, lenders have different ways of determining the score (Borrus, 2002).To interpret scores, one has to find out what kind of score one is referring to. It is understood that there are numerous stores out there in the market that are being sold (Jennifer, 2008). The scores produced in the FICO model are essential to Equifax and Trans-Union. FICO is regarded as the best model since it has served the score developer for a long time.

As for credit ratings they are of different types and they include the following;

  • Corporate
  • Sovereign
  • Short-term
  • Credit bureaus
  • Personal

A corporation credit rating can be defined as a financial gauge to the investors of debt securities. An example of these debt securities may be bonded. They may be given by credit rating agencies such as Standard and Poor’s, Moody’s (Borrus, 2002). The following shows the Standard and Poor’s rating scale and anything lower than a BBB- is taken as an approximate. AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D.A as quoted from Borrus (2002). Sovereign credit rating is of an independent entity, for example, the national government. This credit rating assists in determining the risk associated with investing environment of a state and is of great importance to investors that are looking forward to investing abroad and what is taken into account are the political risk (Jennifer, 2008). Short-term rating which is the opposite of long-term rating takes into account the probability of a consumer getting into default in less than a year. A personal credit rating is a consumer’s credit score including his or her credit report. This affects the ability of a consumer to be given money via financial institutions. The following factors influence a person’s credit rating;

  • Debt
  • interest rates
  • credit used
  • patterns of saving
  • patterns of spending
  • ability to pay a loan

Credit rating has various uses including banks, broker-dealers, issuers and also the government. Credit rating agencies increase the range of investments alternatives, and they provide independence for investors (Jennifer, 2008).

Conclusion

There is no common credit rating but rather each individual gives out credit scores based on their wish list of the best customer. The credit bureau is the one with the mandate of assigning credit scores for individuals. There are also risk models prepared by mortgage investors, rating agencies and mortgage securitizes to estimate the likelihood of losses in their retained risk. It is therefore important to have good knowledge of credit rating and credit scoring as a consumer.

References

Borrus, P. (2002). The Credit-Raters: How They Work and How They Might Work Better: New Jersey Business Week Journal.

Jennifer, J. (2008): Secretary Board of Governors of the Federal Reserve System 20th Street and Constitution Avenue: Washington DC.

Jonathan, S. (2007). Rating Agencies: Civil Liability Past and Future (PDF). New York Law Journal: New York, 238 (88).

Sheffrin, M. (2003). Economics: Principles in action. Upper Saddle River, New Jersey: Pearson Prentice Hall. pp.512.

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IvyPanda. (2022, March 17). Credit Rating and Credit Score Conceptual Review. https://ivypanda.com/essays/credit-rating-and-credit-score-conceptual-review/

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"Credit Rating and Credit Score Conceptual Review." IvyPanda, 17 Mar. 2022, ivypanda.com/essays/credit-rating-and-credit-score-conceptual-review/.

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IvyPanda. (2022) 'Credit Rating and Credit Score Conceptual Review'. 17 March.

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IvyPanda. 2022. "Credit Rating and Credit Score Conceptual Review." March 17, 2022. https://ivypanda.com/essays/credit-rating-and-credit-score-conceptual-review/.

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IvyPanda. "Credit Rating and Credit Score Conceptual Review." March 17, 2022. https://ivypanda.com/essays/credit-rating-and-credit-score-conceptual-review/.

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