Article
Written by Alice Payne
Posted on 29/06/2016

What is a credit rating?

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A credit rating is the score given to an individual, company or country to signify how creditworthy they are. Credit ratings help lenders and investors understand the level of risk involved in lending to that person, company or country, or in doing business with them. The systems of rating creditworthiness can change from country to country, depending on whether an individual or organisation is being rated. But overall, credit ratings provide a fair and standardised way to assess credit risk. The way credit ratings are made differs depending on whether an individual or organisation is being assessed.

How are credit ratings made for individuals?

Individuals need credit ratings for a range of reasons – for instance if they want to take out a phone contract, a bank loan or a mortgage. 

In the UK, there are three main private credit rating agencies – Experian, Equifax and Callcredit. Banks and lenders use information from one or more of these providers to inform who they lend credit to – and how much they should lend. 

Experian credit scores range from 0 – 999, with 0 – 560 being very poor and 961 – 999 valued excellent. With Equifax you’ll get a score of up to 600 plus, while Callcredit will rate you out of five. 

What information do they use?

Credit rating agencies draw on a range of information to determine creditworthiness, including:

  • past and present credit arrangements, particularly how much you currently owe
  • late payments in the last six years
  • the length of your credit history (the longer your credit history the better)
  • bankruptcies or insolvencies
  • court judgments against you
  • official information confirming your identity, such as the electoral register
  • people with whom you are financially associated, for example if you hold a mortgage or joint account together.

How are credit ratings assessed for organisations?

Credit ratings for organisations are determined differently. Globally, there are three main credit rating agencies – Moody’s, Standard & Poor’s and Fitch – which score governments and large companies. They draw on extensive financial and economic data to create a credit rating ranging from A to D. An ‘AAA’ rating means the customer is extremely creditworthy. A D-rating means they have no credit standing. Investors will use this information to decide whether to lend money to a specific country – usually through buying sovereign bonds or treasuries – or even whether to expand their business into that country.

Credit rating agencies like Graydon operate in specific regions and provide business credit information and data intelligence to enable better business decisions. Graydon helps businesses decide whether to partner with or extend credit to other businesses based on their creditworthiness and other commercial insight.  

Why are credit ratings important?

Credit ratings are important because they protect both the lender and the borrower. The lender benefits from a credit rating because it helps them to make more accurate credit lending decisions, reduces their exposure to risk and helps prevent fraud. Credit ratings benefit the borrower by ensuring they aren’t able to receive unsuitable levels of credit, which may lead them into financial difficulty. 

How can I improve my credit rating?

As an individual, there are a number of ways you can improve your credit rating, including ensuring you’re registered on the electoral roll, checking your information is up to date, paying utilities bills promptly and making regular, controlled purchases on your credit card. Your credit history is measured over the previous six years, with the last year being most important – so make sure to set up direct debits to ensure you never miss a payment.

If you are a business and receive an increase in your credit rating, make sure you shout about it – otherwise you could miss out on valuable opportunities. 

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