What is a credit rating and why is it important to investors?

Why Credit Rating Is Important to Investors

Who uses credit rating? The vast majority of people who use credit ratings are businesses and financial institutions. For example, banks will use credit ratings to help determine whether to approve a loan or credit card application. Insurance companies also use credit ratings to help set premiums and decide whether to insure someone. landlords may use credit ratings to help decide whether to rent to a tenant, and employers may use them to help make hiring decisions. What is credit rating in simple words? A credit rating is simply a score that measures an individual's creditworthiness. This score is used by lenders to determine whether or not to extend credit to a borrower, and if so, at what interest rate. The most common credit rating scale is the FICO score, which ranges from 300 to 850. A score of 700 or above is considered good, while a score of 800 or above is considered excellent. What credit score do banks use? Banks typically use a person's FICO score when considering them for a loan or line of credit. FICO scores range from 300 to 850, and the higher the score, the more likely a person is to be approved for a loan.

Does a credit score matter? A credit score is a numerical expression based on a level analysis of a person's credit files, to represent the creditworthiness of an individual. A credit score is primarily based on credit report information typically sourced from credit bureaus.

Credit scores are used by lenders, including banks providing mortgage loans, credit card companies, and car dealerships financing auto purchases, to make credit decisions about whether or not to extend credit and what terms (such as interest rate) to offer. There are many different types of credit scores. FICO® Scores and scores by VantageScore are two of the most popular types of credit scores, but industry-specific scores also exist.

A credit score matters because it is one factor that lenders use to decide whether to lend you money, and if so, how much. Your credit score is not the only factor that lenders will look at when considering a loan, but it is an important one. Other factors that lenders may consider include your income, employment history, and debt-to-income ratio. Who gives credit rating? There are many credit rating agencies (CRAs) that issue credit ratings. The "big three" CRAs in the United States are Standard & Poor's, Moody's, and Fitch. These CRAs are paid by the entities that issue the debt instruments that are being rated.

In the United States, there are also credit rating agencies that are sponsored by the government, such as the National Credit Union Administration (NCUA) and the Federal Deposit Insurance Corporation (FDIC).