Credit ratings are compiled by credit agencies as a way of providing data about how well a company or individual have handled their credit agreements. These ratings are based on information contained in credit reports.
They include information such as promptness of bill payments, any skipped payments, the amount of credit still owing and any applications.
These reports can be quite extensive, so the credit rating provides quick insight into the level of risk a borrower has. The numerical rating system is generally known as credit scores.
These ratings range from 0-999 in most cases, with the lower end of the spectrum indicating a lack of creditworthiness. The higher the rating, the more likely the individual or business is to get access to credit, due to being a low risk.
Credit ratings are used by business and government, while scores are typically used for individuals. With regards to the former, credit rating agencies assign letter grades to indicate ratings. A rating below BBB- is considered junk. These credit ratings can be instrument-specific.
They are essentially an assessment of creditworthiness.
They can be assigned to any entity that is looking to borrow money. A high credit rating indicates a good chance that the loan will be paid back in full and on time.
Credit ratings for individuals typically range from Poor, to unfavourable, average, favourable, good and excellent. They indicate risk levels of either low risk, medium risk, all the way to high risk. These ratings indicate the probability of collection for credit providers.
A sovereign rating on the other hand, is a rating of a country, being considered when a loan is to be extended.
The different types of credit rating provide a glimpse into the creditworthiness of individuals, businesses or governments. This makes the credit-granting decision-making process much easier.