Credit Rating vs. Credit Score

What is a credit rating versus a credit score? The two terms might be used interchangeably in some cases, but there is a distinction between them. A credit rating, expressed as a letter grade, conveys the creditworthiness of a business or government. A numerical credit score, also an expression of creditworthiness, can be used for individual consumers or small businesses.

Certain credit scores—for instance, the Dun & Bradstreet PAYDEX, Experian’s Intelliscore Plus, or the FICO Small Business Scoring Service—apply only to businesses. The PAYDEX uses a scale from zero to 100, while the Intelliscore Plus and FICO SBSS use a scale of 300-850, and zero to 300, respectively. Credit scores for individuals have a range of 300 to 850.

As a consumer, your credit score is a number based on information from your credit reports at the three major credit reporting bureaus—Equifax, Experian, and TransUnion. When it comes to applying for a personal loan, mortgage, or new credit card, you’ll be interested in your personal credit score.

Both ratings and scores are designed to show potential lenders and creditors a borrower’s likelihood of repaying a debt. They are created by independent third parties rather than by creditors or consumers. Credit scores are paid for by the entity requesting it as well as the creditor.

Key Takeaways

  • Credit ratings are expressed as letter grades and used for businesses and governments.
  • Credit scores are numbers used for individuals and some small businesses.
  • An individual’s credit score is based on information from the three major credit reporting agencies, and scores range from 300 to 850.
  • A FICO score takes information from all three major credit bureaus to create an individual’s credit score.
  • Credit ratings are produced by credit rating agencies, such as S&P Global.

What Is a Credit Rating and How Is It Determined?

When creating a credit rating, all agencies can set their own scales, but the ratings most popularly used are produced by S&P Global. It uses AAA ratings for corporations or governments that have the strongest capacity for meeting financial commitments, followed by AA, A, BBB, BB, B, CCC, CC, C, and D for default. Pluses and minuses may be added to distinguish differences between ratings from AA to CCC.

To calculate these ratings, S&P looks at a business’s or government’s history of borrowing and repaying loans. Fitch Ratings and Moody’s are two other companies that create credit ratings. The three organizations also assign outlook ratings—“negative,” “positive,” “stable,” and “developing”—to countries. These indicate the potential trend in a country’s rating over the next six months to two years.

What Are Consumer Credit Scores?

In contrast to credit ratings, credit scores are usually expressed in numbers. The most commonly used credit score in consumer lending decisions is the FICO, or Fair Isaac Corporation, score. FICO takes information from the three major credit reporting bureaus and uses it to calculate an individual’s credit score.

The three bureaus also generate their own credit scores for individuals called VantageScores. These will give you a general idea of where your credit stands and the factors affecting it, but most lenders, around 90%, look at a FICO score rather than these scores when assessing the creditworthiness of a consumer.

Credit factors such as your payment history, the amount you owe, how long your credit accounts have been open (your credit history), new credit, and the mix of credit types go into a FICO score. These scores range from 300 to 850; the higher a consumer’s score, the better the interest rate offered will be.

Credit scores are typically grouped into the ranges of exceptional, very good, good, fair, and very poor.

Each lender will have its own guidelines for granting credit, but generally, scores higher than 740 are considered to be very good or exceptional, while scores between 670 and 740 are considered good and express that the borrower is relatively safe. Scores lower than 670 but greater than 579 are fair. Borrowers with scores in this range may have a few delinquencies in their credit histories. Scores below 580 are considered very poor.

The Bottom Line

Although scales may vary, the most commonly used scales for credit scores consider borrowers ranked in the bottom third of the scale to be risky. Borrowers with FICO scores from 300 to 579, for example, are considered risky, while those with scores ranging from 580 to 850 are considered fair to excellent.

On the S&P credit rating scale, borrowers with ratings under BBB, in the bottom two-thirds of the scale, are considered “non-investment grade,” while those that fall between BBB and AAA on the scale are considered “investment grade.”