June 28, 2019
Trying to get a loan? Your credit rating will play a vital role in loan approvals. A credit rating is basically a quantified assessment of the creditworthiness of the borrower. It can be assessed generally or more specifically, with reference to particular financial obligations. Any individual, a company, a sovereign government or the state can be a borrower. The credit rating is assigned to assess their creditworthiness.
Specialised credit bureaus are entitled with the task of assigning credit scores to individuals. They use a form of Fair Isaac credit scoring (FICO) on a 3-digit numerical scale to determine the credit score. In the case of corporates or governments, credit assessment and evaluation is undertaken by renowned rating agencies like Moody’s, Fitch or Standard & Poor’s (S&P). A favourable credit rating helps companies as well as countries to manage their debt efficiently with different types of loans.
How Does Credit Rating Help?
The basic premise of a credit rating is to determine whether the borrower would be able to pay back a loan within a stipulated period. A borrower is obliged to abide by the loan agreement and repay according to the terms and conditions specified in it. It is the task of a credit bureau to assess the ability of an individual or company to pay back without defaulting.
Short-term as well as long-term credit-ratings are assigned to governments and businesses. Individuals on the other hand, are assessed by credit scores. It takes into account their financial condition and their past credit history. A favourable credit score gives better access to loans. It also determines the rate of interest on the loan.
Personal Loans and Credit Ratings
Credit ratings influence a lender’s decision to approve loans at particular rates. A favourable credit score is likely to provide access to higher amounts at cheaper rates when compared to a weak credit score. High-interest rates are likely to increase the financial burden of the borrower. As a result, it is important for a borrower to maintain a high credit score. Missed payments and loan defaults can affect your credit rating to a large extent.
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