Credit Rating Vs. Credit Score: What's the Difference?
How good is your credit? If it's below the 600-mark, do you know how to fix it?
The average FICO credit score in America sits at an all-time high of 700. The credit rating for the country though has decreased to AA+ since 2011.
What does any of this mean? What can the information do for you if you have bad credit and want to get out of the rut?
To get out of the cycle of bad credit, you need to understand the basics first. You can start by differentiating a credit rating vs. credit score. The first thing to understand is that a credit rating is only for companies and governments.
Defining a Credit Rating
A credit rating looks like a set of letters, the highest being AAA and the lowest being D. In between you'll see ratings like AA, BBB, or C. You may find some ratings with a plus or minus sign to further differentiate them from the others.
Standard & Poor's is the firm that produces these ratings. For the most part, you'll see these ratings for large companies. You'll also see countries rated by S&P to show how well their credit standing is.
In the conversation of credit rating vs. credit score, the average individual has nothing to do with a credit rating. It's only for big companies and governments.
What does a credit rating mean?
It is an indication of a company or country's capability of paying a loan. The higher the rating, the likelier it is the lender will be able to pay off what they borrowed. Every country's credit rating is for the public to see.
S&P calculates these ratings by looking at the lending company's borrowing history, payment history, and commitment to their loans.
What Determines a Credit Rating?
A company's ability to borrow and pay off their loans is the biggest determining factor when it comes to credit ratings. If a company has a good history of borrowing and paying the right amount in time, it will get a better rating.
That's all that S&P takes into account. The firm also looks into a company's economic growth rate. If a company has a bright economic outlook for the next few years, it may get a boosted credit rating.
This is the biggest difference when discussing credit rating vs. credit score. A person's lending outlook is not important when calculating their credit score. The only factor looked into is their credit history and capability to pay.
Defining a Credit Score
A credit score, on the other, is similar but this is for individual people. There are several firms that determine a credit score but the most popular is the FICO score. It is the standard for most people in the United States.
Whereas the S&P credit rating looks like a combination of letters, a credit score is a set of numbers. The highest you can get is 850 and the lowest is 300. Keep in mind that a score below 600 is not so great.
A score above 720 is excellent and anything between 720 and 690 is good. A score set between 690 and 650 are fair and anything below that is poor.
Like the credit rating, a credit score indicates a person's commitment to borrowing and paying loans. A higher score means a person knows how to handle and pay their loans on time. It also shows they have the financial stability to borrow and pay.
What Determines a Credit Score?
Since a credit score is more important for individual people, you might be wondering how they calculate these numbers. There are mainly five factors that determine a credit score:
- Total amount owed
- Complete payment history
- Average age of credit history
- New credit accounts
- Credit mix
The longer your credit history is and the fewer new accounts you have, the better. If you pay your credit on time and don't allow any balance to roll over to the next month, your score increases too. You can also increase your score by keeping a lower utilization ratio. Get a loan or credit only when needed.
When discussing a credit rating vs. credit score, the factors that determine that are quite similar. As mentioned, the main difference is that a credit rating also looks into a business' economic outlook.
Wait, What's a Credit Report?
A credit report is like a transcript of records. It's a full document detailing your credit histories like your full payment history and all the credit accounts you've had over the years. By checking your credit report, you can determine if you're credit performance is decreasing or improving.
Keep in mind that your credit report does not contain your credit score. You can consider a credit score as the final grading and it's something you have to pay for, like an upgrade to your report.
As for the credit report, you can get it for free for a limited number of times per year. Experts recommend you to get your report every now and then. This is especially true if you're working on improving your credit score or your firm's credit rating.
You can get a credit report from Equifax, Experian, and TransUnion. You can only get a report once per year from each firm. If needed, you can also pay these companies to get a look at your credit score but this can affect your score.
Learn More About Credit Rating vs. Credit Score
Want to learn more about your credit score and what you can do to improve it? Do you need to get a loan but you have poor credit? You can learn more here at our learning center.
There's no need to fret. Whether you need a consolidation loan or an individual loan, we've got your back.
Feel free to get in touch and we'll help you secure a better credit score and get the cash you need. If you're in an emergency fit or you aim to fix your financial standing, you can count on us to get you back on your feet.