All large and established companies are carrying out their businesses mostly on credit basis. What does it means is, when certain customer buys from a particular company that the company may allow some period for those customers to pay off the balance. The period allowed is known as credit period. Allowing credit period is very important to retain customers in the highly competitive market as customers can easily switch to some other buyers. However, before granting credit period, assessing the customer’s history and present condition is very important; that is what called assessing credit worthiness. Credit worthiness assessment will be very beneficial to the entity to determine the amount of credit and period of credit.
Credit Rating
Credit rating means a detail financial analysis based on one’s credit history, present financial position, and the likely future income to determine the timely repayment ability of an individual, or a firm to meet its debt obligations. Generally credit rating is carried out by some firms, on behalf of their clients, who are specialized in that field, and widely known as credit agencies. Those firms collect, store, analyze, summarize, and sell such information to their client companies. The lender use this information to make a decision whether to approve the loan or not, and if, he decides to approve, then to decide the maximum amount that can be given and the period of credit. Credit rating is based on quality and quantity of information available, judgments, and experience of the credit agencies. The highest credit rating is AAA, and the lowest rating is D. Dun and Bradstreet, credo line, Dagong global credit rating are some of the examples for credit rating agencies.
Credit Score
Credit score is a number that appears on a consumer credit report, which represents the statistical summary of financial related information of a particular person or a company. It is also known as credit risk score. The lender can use this number to assess the credit worthiness of that credit report holder. Simply, the higher the number, more the credit worthiness. For example, a person with a credit score 550 may not be approved for a loan, whereas another person with a credit score 750, possibly, may be approved for the same loan. Generally, lenders like banks, credit card companies and financial institutions use the credit score to make a decision on credit worthiness of the borrower. Generally credit score lies between 300 and 850.
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What is the difference between Credit Rating and Credit Score? Though, both credit rating, and credit score are used to assess the credit worthiness, they have some difference between them. • Credit rating doesn’t have any mathematical expression, whereas credit score is an output of a complicated mathematical system. • Credit rating is more based on experience and judgment, but credit score is based on mathematical analysis. • Credit score is derived using historical data, and it shows past behavior of pay back; however, credit rating shows the ability of pay back in the future, based on the past, present and some predictable future data. • Credit score is expressed as a number, while credit rating is expressed using alphabets.
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