Credit Rating

How does credit rating work?
A credit rating assesses the credit worthiness of an individual, institution, or a country. Credit ratings are calculated from financial history and current assets and liabilities and tell a lender or investor the ability of the subject to pay back a loan. The economic status along with the fiscal account and existing possessions and liabilities are taken into consideration when credit ratings are calculated to comprehend whether the borrower has the ability to repay the loan. A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates.

Personal credit ratings:
Citizens of countries like the United States are provided with a credit score by the credit bureaus. This credit score is a three digit number which is known as the FICO credit score. This credit score and the credit report are consulted by the financial institutions when the individual is requseting for a loan. In Canada the North American Standard Account Ratings or R is the most comon rating and ranges between R0 and R9. A new account is referred as R0; R1 means on time payment and R9 denotes bad-debt. 

Corporate credit ratings:
The credit of a corporate or an organization is basically the financial indicator to the potential investors in form of bonds. Credit agencies like Fitch and Standard & Poor’s are responsible for this job and the ratings are letter designations like AAA, B and CC.

Sovereign credit ratings:
The credit rating of a nation is termed as a sovereign credit rating. This is done to check on the suitability of investing in the country and is generally used by capitalists when they are exploring options abroad.

While applying for a credit card, loan, mortgage, store card, or rent a property, most lenders will carry out a credit check before accepting the application. In order to ascertain the trustworthiness of a person who is likely to pay bills on time, lenders will usually perform the following checks:

Credit scoring
This part of the credit check is carried out during the application process. The lender will ask the applicant to give details about his/hers’ employment status, address, current bank account and credit card, and income, among other things. The lender will go through the answers with a points system, giving marks for each answer. If the arrived score is above the limit set by the card supplier, the applicant will qualify for the card.

Credit check report
Your credit report file (or credit check file) began on the day a person first opened a bank account, and records every credit card the person applied for, every late payment you've made and every loan you're paying off.

Most of the information on your credit check report comes from the companies you have credit with, such as banks, retailers and finance companies. The file also contains publicly available information such as your address and any County Court Judgments (CCJs) against you.

Individuals have every right to check their credit files: the Financial Services Authority can help you with this. If you believe the information obtained for your credit check is incorrect, you may file a statement explaining why. Inaccurate information can be removed but no one can have accurate information removed from your record.

Various credit rating agencies in the world:
Usually credit ratings for individuals are provided by the credit bureaus; for corporates and countries, the ratings are provided by the credit rating agencies. The major credit bureaus in the United States are Experian, Equifax and Trans Union. In the United Kingdom credit bureaus are called credit reference agencies; Equifax, Experian and Call Credit are the three main agencies in UK.
The principal credit bureaus in Canada are Northern Credit Bureaus, Trans Union and Equifax.
The credit rating agencies that have their networks worldwide include Moody’s, Standard & Poor’s and Fitch.

When one applies for any credit card, loan, and mortgage or even takes a property on rent, the bank or the lender does a check to ensure that the borrower has a clean history and hence will not default on the loan. The checks that are usually done to check the authenticity are:

• Credit scoring: this is done after the application has been submitted by the requestor. The bank requires information about the client’s employment status, yearly income, mailing address, credit card number and bank account. Once these details are furnished by the consumer, the lender evaluates them and then approves the loan.

• Credit check report: an individual’s credit check file starts from the day he opens a bank account and records all the finance related details ranging from the various loans to his late payments. All these information are provided by the companies who have given credit to the individual, the banks, other financial institutions and retailers. One can avail all the details of his credit file from the Financial Services Authority. If any data recorded in the file is incorrect, corrections can be done after proper justification.

Can people with a poor credit rating get personal loans?
Yes, but unfortunately, lenders offering lower APRs tend to have stricter credit check systems and are more likely to reject your application. You must ensure that you are honest and answer 'yes' when you're asked whether you've had credit problems.
With the uSwitch.com personal loan comparison service you can compare the loans available that will accept applications for personal loans from people with poor credit check results (or credit ratings). This will save you the hassle of having your applications rejected, which can also show up as a bad sign in future credit checks.

Credit rating is also very useful in the global investment context. As investment opportunities become more global and diverse, it is difficult to decide not only which companies but also which countries provide good investment opportunities. The risk associated in investing in foreign markets, with sending money abroad are considerably higher than those associated with investing in your own domestic market. Therefore it is vastly important to gain insight into different investment environments and also to understand the risks and advantages these environments pose. Measuring the ability and willingness of an entity - which could be a person, a corporation, a security or a country - to keep its financial commitments or its debt, credit ratings are essential tools for helping you make some investment decisions. In such situations, a credit rating agency comes in very handy. Most credit rating agencies like S&P’s, Moody’s provide sovereign credit ratings on a quarterly basis.