Credit Rating vs. Credit Score: What Is The Difference?

Marina
March 29, 2024

Do you know what is the difference between a credit score and a credit rating? Find out what they are and how they work!

A strong credit rating or credit score is essential when it comes to your financial experience. Whether you’re applying for a loan, renting an apartment, or even getting a job, your creditworthiness plays a significant role. But do you know what is the difference between a credit rating vs a credit score? And how do they work and impact you?

That’s what we are going to talk about today! Find out their key differences and importances, and how you can improve them, so you can understand your credit health better. Also, if you want to check out more financial tips on our website, you can click on this link!

What is a Credit Score?

A credit score is a three-digit number that reflects your creditworthiness. It evaluates your borrowing history and predicts the likelihood of you repaying future loans on time. In simpler terms, it tells lenders how responsible you’ve been with credit in the past.

They are calculated by credit bureaus – Experian, TransUnion, and Equifax – using complex algorithms that analyze various aspects of your credit report. These reports contain details like your payment history, credit utilization ratio (amount of credit used compared to available credit limit), credit card debt, loan history, and the length of your credit history. The scores range from 300 to 850, and are classified as:

Poor Score: between 300 and 579;
Fair Score: from 580 to 669;
Good Score: from 670 to 739;
Very Good: from 740 to 799;
Exceptional Score: from 800 to 850.

Having a good credit score (above 670) translates into several benefits. You’ll qualify for credit cards applications and lower interest rates on loans, including mortgages and auto loans. You might also enjoy better insurance premiums and favorable terms when renting an apartment.

How Can I Improve My Score?

Building and maintaining a a good score takes time and effort. Here are some steps you can take:

Make On-Time Payments: this is the single most important factor. Set up automatic payments to avoid missed due dates;
Pay Down Debt: reduce your credit card balances and other debts to lower your credit utilization ratio;
Don’t Apply for Too Much Credit: space out credit applications and avoid applying for unnecessary credit cards;
Become an Authorized User: being added as an authorized user on someone else’s credit card with a good payment history can improve your score;
Get a Credit Report and Dispute Errors: regularly check your credit report for errors and dispute any inaccuracies that could be bringing down your score. You can access credit reports from each of the three major credit bureaus (Experian, Equifax, and TransUnion) or once a year through AnnualCreditReport.com.

What is a Credit Rating?

A credit rating, on the other hand, is a letter grade assigned to a borrower’s creditworthiness, such as businesses, corporations or governments, by credit rating agencies like S&P Global Ratings, Moody’s, and Fitch Ratings. Similar to a credit score, it reflects the ability of an entity to repay debt obligations.

Credit rating agencies analyze a company’s or government’s financial health, considering factors like profitability, debt levels, and economic conditions. Based on these informations, they assign a letter grade (AAA, AA, A, BBB, etc.) that indicates the level of credit risk associated with borrowing from that entity.

Investors use credit ratings to assess the risk of investing in a company’s bonds or government debt. A high credit rating signifies a lower risk of default, making the bonds more attractive to investors.