Definition
A Credit Rating (Report) is a comprehensive assessment of an individual’s or a business’s creditworthiness, typically compiled by credit rating agencies such as Equifax, Experian, and TransUnion for individuals, and Dun & Bradstreet for businesses. These reports include detailed information about a borrower’s credit history, including credit limits, current balances, repayment history, and any incidents of delinquency or default.
Key Points:
- For Individuals: The report includes details like credit limits at different stores, current balances, repayment terms, missed payments, and more. Ratings are summarized in FICO scores, which range from poor to excellent.
- For Businesses: Reports often provided by companies like Dun & Bradstreet evaluate a business’s financial stability, operational history, and creditworthiness.
- For Bonds: Agencies such as Moody’s and Standard & Poor’s evaluate the credit risks associated with publicly held bonds, helping investors assess the likelihood of repayment.
Examples
Example 1: Individual Assessment
Goodmoney Savings Association evaluated the credit report on Jane Collins before issuing her a mortgage loan. The report contained her credit limits at various stores, current balances, the number of days required for repayment, and noted any past defaults. Based on this information, a FICO score was assigned.
Example 2: Business Assessment
A small business, XYZ Corp, applied for a loan and its credit report was obtained from Dun & Bradstreet. The report detailed the company’s payment history, credit liabilities, and overall financial health, aiding the bank in its decision-making process.
Example 3: Bond Assessment
An investor considered purchasing bonds from ABC Corp. A report from Moody’s provided an evaluation of the bond’s credit risk, including the corporation’s payment history, financial ratios, and overall creditworthiness.
Frequently Asked Questions (FAQs)
What are FICO scores?
FICO scores are a type of credit score created by the Fair Isaac Corporation. They range from 300 to 850 and assess credit risk.
How can I access my credit report?
Individuals are entitled to one free credit report annually from each of the three major credit reporting agencies through AnnualCreditReport.com.
What factors affect my credit rating?
Factors influencing your credit rating include payment history, amounts owed, length of credit history, types of credit used, and new credit.
How often is my credit report updated?
Credit reports are typically updated monthly, but this can vary depending on how frequently creditors report information to the credit bureaus.
How can I improve my credit score?
Improving your credit score can be achieved by paying bills on time, reducing outstanding debt, avoiding new credit queries, and having a mix of different types of credit.
Related Terms
Credit Bureau
A Credit Bureau is an organization that gathers, stores, and provides information regarding an individual’s or business’s credit history to aid lenders in making credit decisions.
Default
A Default occurs when a borrower fails to meet the legal obligations (or conditions) of a loan, such as not making the scheduled payments.
Credit Limit
Credit Limit is the maximum amount of credit that a lender will extend to a borrower.
Delinquency
Delinquency refers to a situation where a borrower fails to make timely payments as stipulated in their credit agreement. This can negatively affect a credit rating.
Online Resources
- AnnualCreditReport.com: Obtain your free annual credit reports.
- MyFICO: Learn about credit scoring and access your FICO scores.
- Credit Karma: Access free credit scores, reports, and monitoring services.
- Dun & Bradstreet: Business credit reports and ratings.
- Experian: Personal and business credit information services.
References
- FICO. “Understanding FICO Scores.” Accessed March 2023. Link
- Experian. “What makes up a credit score?” Accessed March 2023. Link
- Dun & Bradstreet. “Understanding your Business Credit Report.” Accessed March 2023. Link
- Consumer Financial Protection Bureau. “Frequently asked questions about credit reports.” Accessed March 2023. Link
Suggested Books for Further Studies
- Credit Repair Kit for Dummies by Steve Bucci
- Your Score: An Insider’s Secrets to Understanding, Controlling, and Protecting Your Credit Score by Anthony Davenport
- The Road to 850: Strategies for Building Your Best Credit Score by Al Bingham
- Business Credit Decoded by Ty Crandall
- Credit Rating and Bank-Firm Relationships: New Evidence from Medium-Sized Enterprises in Europe by Maurizio La Rocca, Tiziana La Rocca, et al.
