Credit Score vs. Credit Rating: What’s the Difference?
Savit Chaurdhary
Savit Chaurdhary
Tuesday 23 Jul 2024
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In any context that relates to finance, there are always concepts like credit score and credit rating mentioned. Though they may appear similar they are used in different context and have different effects. It is therefore important to distinguish between credit score and credit rating when facing the decision of getting the best credit card in India or a low interest rate credit card.


What is a Credit Score?


Credit Score is simply a number that a company gives out to represent the credit worth of an individual. In India, it is a three digit figure ranging from 300-900 and the higher the figure the better the credit worthiness. Major credit bureaus like CIBIL, Experian, and Equifax calculate credit scores based on various factors, including :Major credit bureaus like CIBIL, Experian, and Equifax calculate credit scores based on various factors, including:


- Payment History: The payment of previous debts made in good time.

- Credit Utilization: The current credit utilization ratio which is the current balance carried forward on the credit cards divided by credit line.

- Length of Credit History: The time period for which you have been using credit accounts.

- Types of Credit: The total credit accounts for credit cards, and loans, and any other credit facilities.

- Recent Inquiries: The frequency of the requests for new credit during the last 12 months.


What is a Credit Rating?


Credit card Rating on the other hand is a systematic evaluation of the ability of a borrower to pay back his/her loan or the probability that a borrower will default, this rating is normally in form of letters. These credit ratings are given by credit rating agencies such as CRISIL, ICRA, and CARE among others. In the case of persons, credit ratings are not very popular and are more associated with organisations or governments who intend to borrow huge amounts of money. Ratings are often expressed as:Ratings are often expressed as:


- AAA, AA, A: Sound credit profile.

- BBB, BB, B: Medium credit quality.

- CCC, CC, C: Credit quality: This can be defined as low credit quality as this depicts the overall quality of the credit portfolio of an organization.


Key Differences


1. Purpose:

- Credit Score: Usually employed by the credit providers as a tool for credit scoring.

- Credit Rating: These were commonly used to evaluate the creditworthiness of entities that are considered large such as corporations and state departments.


2. Users:

- Credit Score: Used by banks, credit card companies, and other lenders.

- Credit Rating: Common in the use by investors, financial institutions, and the bond markets.


3. Range and Format:

- Credit Score: Numerical range of the variable (300-900 in India).

- Credit Rating: Credit ratings (AAA, AA and so on).


4. Scope:

- Credit Score: emphasizes the individual’s credit record.

- Credit Rating: Assesses the general position and credit quality of the bigger subjects.


Conclusion

To sum up, credit scores and credit ratings are both the measures of creditworthiness, but they are used for different aim and are targeted at different audiences. This distinction is pertinent to every decision, you make pertaining to your credit card in India whether it’s looking for the best credit card in India or a low interest credit card. It is advisable that one frequently check his/her credit score and knowledge of the score can greatly improve one’s financial standing and credit worthiness.


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