An opinion of a credit agency regarding the ability and willingness an entity to fulfill its financial obligations
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What is a Credit Rating?
A credit rating is an opinion of a particular credit agency regarding the ability and willingness an entity (government, business, or individual) to fulfill its financial obligations in completeness and within the established due dates. A credit rating also signifies the likelihood a debtor will default. It is also representative of the credit risk carried by a debt instrument – whether a loan or a bond issuance.
A credit rating is, however, not an assurance or guarantee of a kind of financial performance by a certain instrument of debt or a specific debtor. The opinions provided by a credit agency do not replace those of a financial advisor or portfolio manager.
Who Evaluates Credit Ratings?
A credit agency evaluates the credit rating of a debtor by analyzing the qualitative and quantitative attributes of the entity in question. The information may be sourced from internal information provided by the entity, such as audited financial statements, annual reports, as well as external information such as analyst reports, published news articles, overall industry analysis, and projections.
A credit agency is not involved in the transaction of the deal and, therefore, is deemed to provide an independent and impartial opinion of the credit risk carried by a particular entity seeking to raise money through loans or bond issuance.
Presently, there are three prominent credit agencies that control 85% of the overall ratings market: Moody’s Investor Services, Standard and Poor’s (S&P), and Fitch Group. Each agency uses unique, but strikingly similar, rating styles to indicate credit ratings.
Types of Credit Ratings
Each credit agency uses its own terminology to determine credit ratings. That said, the notations are strikingly similar among the three credit agencies. Ratings are bracketed into two groups: investment grade and speculative grade.
- Investment grade ratings mean the investment is considered solid by the rating agency, and the issuer is likely to honor the terms of repayment. Such investments are typically less competitively priced in comparison to speculative grade investments.
- Speculative grade investments are high risk and, therefore, offer higher interest rates to reflect the quality of the investments.
Users of Credit Ratings
Credit ratings are used by investors, intermediaries such as investment banks, issuers of debt, and businesses and corporations.
- Both institutional and individual investors use credit ratings to assess the risk related to investing in a specific issuance, ideally in the context of their entire portfolio.
- Intermediaries such as investment bankers utilize credit ratings to evaluate credit risk and further derive pricing of debt issues.
- Debt issuers such as corporations, governments, municipalities, etc., use credit ratings as an independent evaluation of their creditworthiness and credit risk associated with their debt issuance. The ratings can, to some extent, provide prospective investors with an idea of the quality of the instrument and what kind of interest rate they should be expecting from it.
- Businesses and corporations that are looking to evaluate the risk involved with a certain counterparty transaction also use credit ratings. They can help entities that are looking to participate in partnerships or ventures with other businesses evaluate the viability of the proposition.
Credit Score
A credit rating is used to determine an entity’s creditworthiness, wherein an entity could be an individual, a business, a corporation or a sovereign country. In case of a loan, the rating is used to establish whether a loan should be rendered in the first place. If the process goes further, it helps in deciding the term of the loan such as dates of repayment, interest rate, etc.
In the case of bond issuance, the credit rating indicates the worthiness of the corporation or sovereign country’s ability to repay the bond payments in due time. It helps the investor evaluate whether to invest in the bond or not.
A credit score, however, is strictly for indicating an individual’s personal credit health. It indicates the individual’s ability to undertake a certain load and his or her ability to honor the terms and conditions of the loan, including the interest rate and dates of repayment. A credit score for individuals is used by banks, credit card companies, and other lending institutions that serve individuals.
Additional Resouces
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FAQs
Although ranges vary depending on the credit scoring model, generally credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and up are considered excellent.
What is meant by credit rating? ›
A credit rating is an opinion of a particular credit agency regarding the ability and willingness an entity (government, business, or individual) to fulfill its financial obligations in completeness and within the established due dates. A credit rating also signifies the likelihood a debtor will default.
What are the 5 levels of credit scores? ›
Here's how FICO breaks down credit scores:
- Below 580: poor.
- 580 to 669: fair.
- 670 to 739: good.
- 740 to 799: very good.
- 800 and above: exceptional.
A credit score of 900 is not possible, but older scoring models that are no longer used once went up to 900 or higher. The highest possible credit score you can get now is 850.
Can I buy a house with a credit score of 700? ›
So yes, 700 ought to be a good enough credit score to buy a house. In fact, says DiBugnara, “a credit score of 680 or above will likely give borrowers access to 95 percent of financing options available.”
Does anyone have an 850 credit score? ›
How many Americans have an 850 credit score? Only 1.31% of Americans with a FICO® Score have a perfect 850 credit score. While a score this high is rare among any demographic, older generations are more likely to have perfect credit. Baby boomers make up a whopping 59.4% of the people with an 850 credit score.
What is a bad credit rating? ›
A bad credit score may be one that falls into credit score ranges that FICO and VantageScore® consider poor or very poor. A poor FICO credit score might be considered less than 580. A poor VantageScore credit score might be 600 or less, with very poor scores being 499 or less.
What is a good credit score to buy a house? ›
You'll typically need a credit score of 620 to finance a home purchase. However, some lenders may offer mortgage loans to borrowers with scores as low as 500. Whether you qualify for a specific loan type also depends on personal factors like your debt-to-income ratio (DTI), loan-to-value ratio (LTV) and income.
Why is my credit rating so bad? ›
Many factors contribute to a low credit score, including little or no credit history, missed payments, past financial difficulties, and even moving home regularly. Credit reference agencies collect information from public records, lenders and other service providers, before generating a credit score.
How rare is a 700 credit score? ›
Credit score distribution: How rare is an exceptional 800 to 850 score?
| FICO® Score range | Percent within range |
|---|
| 600-649 | 9% |
| 650-699 | 12% |
| 700-749 | 17% |
| 750-799 | 24% |
4 more rowsMay 31, 2023
The credit score required and other eligibility factors for buying a car vary by lender and loan terms. Still, you typically need a good credit score of 661 or higher to qualify for an auto loan. About 69% of retail vehicle financing is for borrowers with credit scores of 661 or higher, according to Experian.
How much can I borrow with a 700 credit score? ›
You can borrow from $1,000 to $100,000 or more with a 700 credit score. The exact amount of money you will get depends on other factors besides your credit score, such as your income, your employment status, the type of loan you get, and even the lender.
How rare is an 800 credit score? ›
According to a report by FICO, only 23% of the scorable population has a credit score of 800 or above.
What is the average credit score in the US? ›
What is the average credit score? The average FICO credit score in the US is 717, according to the latest FICO data. The average VantageScore is 701 as of January 2024. Credit scores, which are like a grade for your borrowing history, fall in the range of 300 to 850.
What's a perfect credit score? ›
And when it comes to credit, 850 is the highest the FICO® Score☉ scale goes. For more and more U.S. consumers, practice is making perfect. According to recent Experian data, 1.54% of consumers have a "perfect" FICO® Score of 850.
What is the average credit score in the United States? ›
The average FICO credit score in the US is 717, according to the latest FICO data. The average VantageScore is 701 as of January 2024. Credit scores, which are like a grade for your borrowing history, fall in the range of 300 to 850. The higher your score, the better.
What is a good credit score for my age? ›
What is a good credit score for your age? You might consider your score to be good if it meets or exceeds the average for your peers, but that isn't the best gauge. Following NerdWallet's general guidelines, a good credit score is within the 690 to 719 range on the standard 300-850 scale, regardless of age.
Can I buy a house with a 623 credit score? ›
Can I get a mortgage with an 623 credit score? Yes, your 623 credit score can qualify you for a mortgage. And you have a couple of main options. With a credit score of 580 or higher, you can qualify for an FHA loan to buy a home with a down payment of just 3.5%.
Is 750 a good credit score? ›
When your score is 750, you're in a strong position to qualify for most financial products and get among the very best rates on them. A 750 credit score is considered excellent on commonly used FICO and VantageScore scales, which range from 300 to 850.
