Credit Rating – An Introduction

Credit Rating – An Introduction

Credit in simpler terms can be defined as a delayed payment for the purchased goods. Credit, a practice as old as the civilization, has undergone a revolutionary change in the recent years due the restless efforts of market forces. Now credit market is a highly competitive and booming sector having its sway over almost every requirement of human wants. The increase in number of players and the cut throat competition in this sector have envisaged the demand for effective risk management. Credit rating is a commonly practiced risk management method which helps in smooth functioning of credit granting process.

Credit rating is nothing but the assessment of any body’s credit worthiness. This assessment can be applicable to organizations and even to a nation. Credit rating reports give an impression about the chances of repayment if credit is granted. A high credit rating symbolizes the potential of timely repayment and good past track record, hence making the process of credit granting a less burdensome task while a poor credit rating generates the reverse idea. The high credit rating leads to lower interest rates, less paper work and early release of the amount while a low credit rating results in a higher interest rate or sometimes refusal of the amount. Fair Isaac Corporation of USA pioneered the concept of credit rating in 1950s.

Depending upon the subject, personal, corporate and sovereign credit rating can be obtained. Personal credit rating depends upon ability to repay the loan with interest, saving and sending patterns, amount of credit used by the person. Corporate credit rating is the financial indicator of a certain company for the prospective investors. The sovereign credit rating reveals the credit worthiness of a country hence acting as a judgment baton for foreign investors.

Credit rating agencies deal with the task of assigning credit ratings for issuers of different types of debt obligations.the issuers are commonly companies, NGOs (Non govermental organisations) and the state. Credit bureau issues credit scores for individuals. Some of the renouned agencies which deal with assigning credit scores are A.M. Best, Moody’s, Standard and Poors and Fitch Ratings of USA, Baycorp Advantage of Australia, and Dominion Bond Rating Service of Canada. These agencies not only perform credit rating but also provide useful investment information.

Credit rating as a whole can be discussed under two heads, i.e. Short Term Credit Rating and Long Term Credit Rating. Short term credit rating deals with the probability of a borrower becoming defaulter within a year while long term credit rating is calculated over a longer time period. Credit ratings are helpful to investors, investment banks, broker-dealers, and governments. Credit rating agencies increasing the range of investment possibilities and help the investors to form an independent, lucid measurement of relative credit risk.

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