Credit Rating
Candlefocus EditorCredit ratings may be either used by traditional financial entities or by those providing alternative forms of credit such as peer-to-peer lending. They can also be used by employers to screen potential employment applicants.
Credit ratings are fundamentally based on the borrower's past payment performance and relations with existing creditors. An individual’s credit rating is usually determined by their credit score, which is usually calculated using the Fair Isaac Corporation’s (FICO) algorithm. This score is based on the consumer’s profile and credit history. The credit score is typically a number between 300 and 850, with higher scores indicating higher levels of creditworthiness.
Bonds issued by businesses and governments, meanwhile, are usually rated on a letter-based system ranging from AAA (highest rating) to D (lowest rating). These ratings indicate the risk of default by the issuer, and thus the probability of the debt being repaid in a timely manner.
In some cases, a borrower facing financial difficulties may have their credit rating downgraded or their credit score lowered, a sign that lenders may be less likely to lend them money. Knowing their credit rating and working to maintain a strong credit score is important to any consumer or enterprise seeking to access credit services. This ensures they can access credit at a reasonable interest rate, while helping lenders to manage their financial exposure.