Credit ratings are important for various reasons. It can decide whether you can qualify for a loan or financing. Typically, your rating will be based on the history of debt repayment, including personal loans and credit cards. This rating will give the lenders an insight into whether you could pay them back. If you have a high credit rating, you may get the best opportunity to get better financing. While a poor rating will only increase the interest rate, you may not get approved for financing and might even need to offer to pay creditors through consumer proposals. Let’s know more about credit rating in this article.
Definition of Credit Rating
The term credit rating signifies the borrower’s creditworthiness in terms of financial obligation and debts. A credit rating can be applied to a person, a sovereign government, a company, or any authority that wants to borrow money.
Understand Credit Rating
When you take a loan, it will be considered a loan. Your credit rating will determine whether or not you can pay back the amount to the lender.
If you cannot pay the debt, you can opt for consumer proposals, a debt consolidation option. Here, you can propose to the lenders to pay off some of the money or extend the time for repayment.
However, if you have a good credit rating, you can easily request loans, and you might get accepted based on the good rating. The lender will check the credit rating, and they will then agree to lend you money.
Credit Scores vs Credit Rating
Credit ratings mainly apply to governments, businesses, and individuals. In contrast, credit scores will only apply to individuals. Credit scores can be extracted from credit reporting companies like TransUnion, Experian, and Equifax. And the scores range from 300 to 850.
A credit rating for the short-term period is for the borrower who may default in one year. It is a common thing these days. However, long-term ratings are more seriously considered by lenders, which will tell them the defaulting history of the borrower.
They can also check the debt repayment history and other records of the borrower, and only by checking that do they agree to lend money.
What Factors Affect Credit Ratings?
- Due to some company-related issues, the timely repayment of debts is cancelled
- The market understanding of the organization
- Current income and cash flow in the company
- The amount the company currently owes & the type of debt that isn’t paid
- The payment history of the company
Why is Credit Rating Important?
You will always look for a high credit rating if you need funding for your company. This way, you will get instant approvals from lenders, and the interest rate will be less. Most lenders will give loans when you have a good credit rating, as they want to know if you can pay them back.
A credit rating is not only for getting the approval for a loan, but the interest rate you will have to pay. You will get a higher rate when you don’t have a better rating.
On the other hand, having a good rating can give you less interest rate. However, if you cannot pay off the previous debts, you can take help from consumer proposals. It is a loan consolidation service from a licensed insolvency trustee, where you can propose to the lender to pay off some of the money or for an extension in the payment date.
The ratings will also matter when you want to buy bonds for investment. When you have a poor rating, investing in something will be risky, and you may not be able to repay the cost of the bond.
Your credit rating will never be stable, so you have to be careful about keeping a good to high rating.
In addition, credit will take time to build up. If you have a high rating with a short credit history will not be regarded as a positive thing when another person has a good credit rating with a long history. Lenders will always want to know if you have maintained a good rating over the years. Credit rating is important for businesses, individuals, and several governmental authorities.
At the end of the day, a good credit rating will always keep you safe whenever you need to borrow money from a lender. Your company’s creditworthiness will also give you a better reputation in the market.