A credit rating is an assessment of the possible ability of a borrower to default on a loan. Credit rating agencies and credit bureaus provide credit information to financial institutions. It helps them to make a decision whether to approve a loan or not. The information includes your payment history, employment and personal information, list of current and past credit accounts and their balances, and history of past credit problems.
Credit rating can be assigned to sovereign governments, regional and local executive bodies, financial organizations, and corporations. There are different types of credit ratings: personal, corporate, and sovereign. Personal credit ratings, also known as credit score, describe one's capability of borrowing money through financial institutions like banks and credit cards. When you apply for a credit card or mortgage, your credit rating is checked. Your credit ratings are drawn from your credit report that is a profile of your charging, borrowing, and repayment activities. People with higher credit ratings tend to qualify for lower-cost loans, while people with lower ratings might have to pay a higher interest rate.
Corporate credit ratings (bond credit rating) are used to evaluate the bonds issued by enterprises or economic bodies. It is an opinion of a company's overall creditworthiness. The rating shows financial, sectorial, operational, legal, and organizational sides of the company.
Sovereign credit rating shows the overall ability of a country to provide a secure investment environment. It is used by investors who are looking to invest abroad. It reveals factors like levels of public and private investment flows, foreign direct investment, country's economic status, foreign currency reserves, political stability, transparency in the capital market, and the ability for a country's economy to stay constant regardless of political change.
All credit ratings are revised and monitored on a continued basis by rating agencies. International rating agencies assign short-term and long-term credit ratings. Short-term rating evaluates the probability of borrower?s default within one year. Long-term rating gives the likelihood of default over a longer time.
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