What are Credit Ratings?

What are Credit Ratings?

Credit ratings have remained a critical aspect of the financial system, and regulators have always relied on credit ratings.

The Basel Committee uses credit ratings to determine credit risk capital for banks. The Basel Committee has outlined two alternative calculations for some capital determinations: one for countries willing to employ external ratings and one for countries that are not.

Credit ratings are designed to answer the question: “How likely is an entity to default on its obligations? An external credit rating is usually an attribute of an instrument issued by an entity (rather than of the entity itself) which expresses how likely it is that the company will be able to repay its loan.

Example of Credit Ratings:

Credit scores and credit ratings are frequently used interchangeably. Most corporations, for example, receive credit ratings from agencies such as Standard & Poor’s in the form of letter grades (such as triple-A, double-A, or A), whereas you receive a credit rating in the form of a score, known as a FICO score.

The length of your credit history, prior repayment history, and credit use are the most frequent elements that determine your credit score. The three credit reporting agencies use these details to create your credit profile, determining your overall credit rating and score.

Why are Credit Ratings important?

Borrowers with good credit ratings can readily borrow money from financial institutions or the public debt markets. Banks will often base loan terms on your credit rating at the consumer level, so the better your credit rating, the better the loan terms will typically be.