Who Issues Credit Ratings or Credit Scores

The topic of credit has redefined the world of financial products. The ‘word’ credit may look small and simple, but this one word contains a lot of perks and benefits. With the emergence of a digital and cashless world, ‘credit’ is becoming indispensable. Credit does not only allow customers to borrow money and pay later, but also provides many benefits and privileges.

In order to get credit, one has to prove their creditworthiness also. Using credit judiciously enables them to become a creditworthy person, resulting in a number of benefits like low rates of interest.

• What is a Credit Score?

A credit score is a generic numerical representation that expresses the creditworthiness of the cardholder. The credit score is defined in three numbers that range from 300 to 900. The higher the number is, the higher is the creditworthiness. An ideal credit score should range from 700 to 900. Generated based on a mathematical algorithm, the information provides crucial insights into the financial management of an individual.

• What Is a Credit Rating?

A credit rating is a brief analysis of the credits risks that are associated with your financial credentials. The rating is entirely based on the terms of borrowing and lending of the amount done in the past. It is an opinion of a specific credit agency for an entity that signifies the credit risk.

It comes 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 balance report of assets and liabilities. Credit rating says how much likely the person will repay debt on time.

• Importance of Credit Rating

  • Easy Loan Approval: With high credit rating, the person is viewed by the lender as a borrower with lower risk. Therefore, any lender or bank will easily and quickly approve their loans.
  • Considerate Rate of Interest: A credit rating is one of the important factors that helps determine the rate of interests for the loan/credit. Higher the credit rating, lower the rate of interest.

• Difference between Credit Rating and Credit Score

Often these two terms ‘credit rating’ and ‘credit score’ get interchanged, but they are not the same. Here’s how they differ:

  • A credit rating predicts the creditworthiness of a firm or company, i.e., how much likely a firm or a company is to repay credit on time, whereas a credit score expresses the creditworthiness of an individual.
  • A credit rating is defined in alphabets, such as Triple-A, followed by double-A,A, Triple-B, Double-B, until D. Plus and minus are also added to them, whereas credit scores are expressed in three digits. The credit score usually varies from 300 to 900, the higher it goes, the better it is.
  • Credit scores are issued by credit bureaus based on the information of the credit report. But credit rating is issued by various credit rating issues.

• How Do Credit Ratings Work in India?

Rating agencies assess companies that include privately owned firms and companies, state governments, non-profit organizations, countries, securities, unique purpose entities, and local governmental bodies. Several factors are given thought while calculating credit ratings – Financial statements, lending and borrowing history, level and type of debt, ability to repay the debt, and past debts of the entity before rating them are some of them. All the credit rating agencies calculate the credit rating based on an algorithm. Every month the credit rating agency collects credit information from banks or lenders. Based on this credit rating, any bank or investor or lender or financial institution decides on whether to invest money, buy bonds, give loans or issue credit cards. Once the agency does the ratings, additional inputs are provided to the investors.

Credit Reports are categorized into two types –

  • Commercial Credit Report for business entities such as proprietorship firm, partnership firm LLP Pvt Ltd.
  • Individual Credit Report.

Both of these reports are prepared based on the past performance of loan repayments and credit card bills.

Credit rating is generally released based on the finances of the firm, external factors like political, economic, etc. Credit Rating also depends on the type of industry. If we talk about the current situation, the Credit rating for the FMCG industry would be better as to any hospitality sector industry.

• Who Issues Credit Scores in India?

A credit score or credit rating indicates the credit health of an individual or a company. Maintaining a reliable credit rating and credit score helps the individual or the organization to get loans and additional credit cards quickly. A good credit score or rating depicts that the individual is a low-risk customer that always attracts potential lenders.

A credit agency is responsible for evaluating the credit rating of a debtor. It inspects the qualitative and quantitative attributes of the entity. The information, such as financial statements, annual reports, overall industry analysis, and projections are sourced from the financial institutions. The agency does not hold any involvement in the transactions. Hence it is free to provide an independent and impartial opinion of the credit risk possessed by a specific entity looking for loans or bond issuance.

Several companies are registered under the Credit Information Companies Regulation Act, 2005. These companies are authorized by The Reserve Bank of India to provide credit scores or ratings that are entirely based on past performances of the cardholders. Credit Information Bureau India Limited, often known as CIBIL, is the leading credit information bureau of the country. Equifax ,High Mark CRIF and Experian are the other significant players that issue credit scores. CIBIL, being the oldest in the market, is the most reliable and accurate Credit Bureau.

In today’s competitive economy, a low credit score or bad credit rating is very undesirable. Individuals with low credit scores or bad credit ratings are considered to be financially risky and it becomes tough for them to receive any investment or loan, or else even if they get approved for loans, the interest rates are too high. And this is not only applicable for individuals, but also for a government or an organisation, and any companies will push themselves away from doing business with them or investing in them.

By avoiding late payments or by doing right on-time payments, they can prevent themselves from having a low credit score or bad credit rating. They should also consider how much they are borrowing, as they should always borrow that much which they can repay or return added with interest.

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