What Is The Importance Of Credit Rating?
While availing a personal loan, lenders tend to ask for a CIBIL score, credit score or credit score rating. Though lenders consider credit scores to be an important eligibility criteria, borrowers must know what credit rating is.
Credit rating is assigned to an organisation or a business and a credit score or CIBIL score is assigned to an individual. This is why it is essential to understand the importance of credit ratings and the difference between them and credit scores.
Credit rating is an alphabetical valuation assigned by a credit agency to the organisation, whereas a credit score is a 3-digit number allotted to the individual.
In India, credit score for individuals is commonly referred to as credit rating although both have entirely different meanings and use cases. Applying that yardstick, the importance of credit rating or credit score lies in the fact that this 3-digit number or alphabet defines the creditworthiness of the borrower.
How Credit Ratings Works?
From the borrower’s perspective, a high credit score rating can help with the following:
- Easy loan approval: This is where the importance of a credit score lies. A borrower with a high credit score rating shows high creditworthiness and is considered to be a low-risk customer. Lending institutions are quick to approve the loan application of such borrowers.
- Interest rate: When it comes to personal loans, every institution charges interest on the loan amount. A high CIBIL score or credit score gives the borrower the leverage to negotiate and avail an online loan with a lower interest rate.
- High loan amount: One of the benefits of a good CIBIL score is that the borrower can avail a loan of a higher amount.
Is credit rating important to lenders? Credit ratings are usually issued for organisations or businesses. Typically they have alphabetical ratings like AAA and CCC. Lenders will look at the credit ratings of an organisation before allocating any loans to them. This is why credit ratings are equally important to lenders.
High Creditworthiness: Before disbursing an instant loan, lenders need to be assured that the borrower is capable of repaying the loan. The credit score rating is considered to be proof of the borrower’s creditworthiness. The higher the credit rating, the higher the creditworthiness of the borrower.
Safety: An individual with a high credit score and an organisation or business with a high credit rating is more likely to repay their debt, assuring a sense of safety to the lender.
Calculating Credit Ratings
Various parameters are considered while assigning a credit rating and credit score. Though each credit rating agency has its process and methodologies, the basic premise and calculation remain the same.
To be assigned a credit rating or credit score, rating agencies typically evaluate an individual’s or organisation’s earnings, spendings, borrowings, repayments, credit exposure, credit utilisation and credit mix. Depending on these parameters a 3-digit number or alphabet is assigned.
The credit score range is 300 to 900. Anything above 750 is considered to be a good credit score rating. For new borrowers who are yet to avail of any credit or loan, NA (Not Applicable) or NH (No History) is assigned.
Who Get The Benefits from Credit Ratings?
- Intermediaries: Intermediaries like brokers or investment banks can use credit ratings to gauge the credit risk associated with the business.
- Individual investors: Credit ratings can be used by individual investors to judge the risk associated with investing in specific funds.
- Businesses and financial institutions: Institutions that are planning to invest in partnerships use credit ratings to assess the viability of the proposal.
Credit ratings or credit scores are used to evaluate creditworthiness. It can be an individual, a business, a corporation. When it comes to loans, a credit score is used to establish if a loan should be disbursed to an individual or not. Credit ratings, on the other hand, help lenders assess this for businesses or organisations. Credit scores or credit ratings also help lenders to decide the terms of the loan including the interest rate, tenure and principal amount.
At Finnable, we offer personal loan for individuals who may or may not have a credit score. Our personal loans for individuals are quick, have an attractive rate of interest and flexible tenures to suit various needs. What’s more, you can avail a personal loan online by completing a few quick steps.
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