Credit rating is a measure that allows banks and lending institutions to predict how capable you are of repaying your debts.

Get to know Credit Ratings

Credit rating is one of the most important tools that banks and lending institutions have in determining whether a borrower is able to repay a loan.

Depending on the country you live in and the institution you want to borrow from, your credit rating may consist of different statistics. Credit ratings can also be applied to companies. 

Basically, every entity that plans to borrow money from a bank or institutional lender must have a credit rating.

What is a Credit Rating Agency?

Since credit ratings play an important role when banks decide whether to grant a loan or not, this practice has now become a business.

Credit rating agencies are companies created specifically to analyze customers' spending and credit history in order to compile their credit rating. Some companies focus on evaluating individual credit scores, while others focus on assessing the credit ratings of large companies, national banks, and even countries.

How to Calculate Credit Rating?

Personal credit scores are calculated based on a number of factors. Most importantly, credit rating agencies consider settled debts, outstanding debts and the extent to which you are paying them, as well as your monthly income.

Apart from that, status as a home owner also plays an important role. If you own your own home but have a mortgage on it, this may affect your credit rating.

Type of Credit Rating

There are short-term and long-term credit ratings, depending on the type of credit or loan you are seeking.

Short-term credit ratings determine how likely you are to get credit with a smaller amount and fewer installments.

Your long-term credit rating estimates whether you will be able to repay larger lines of credit over a longer period of time.

The global credit rating industry, which evaluates credit scores for governments, is dominated by three large companies, namely Moody's, S&P Global, and Fitch Ratings. 

These three companies consider the current economic situation in countries and evaluate their feasibility of taking on more national debt.

The Importance of Credit Ratings

Having a good credit rating is very important because your score determines your future loan conditions.

If your credit rating is good, you are more likely to get a loan with a favorable interest rate and APR (Annual Percentage Rate) .

Unfortunately, if your credit rating is not very good, you may be denied a loan or offered a loan with a much higher interest rate.

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