What is credit rating?

credit rating

So many materials are available on credit rating and how important the concept is to: individuals, big, small and medium scale businesses.

At a point in time, everyone has in one way or the other borrowed money from someone either a friend, family or from the bank with the promise of paying back. Most likely, the issue the lenders faces is whether or not you have the capacity to return the borrowed money at the stated time or date.

Credit rating is an evaluation or assessment of the borrower to determine whether or not the individual, business organization or government can likely pay back the borrowed money and the date at which the money can be paid back. It is to note that it is not necessarily money that the debtor borrows; it can sometimes be assets, stocks, shares, etc.

Hence, in order for the lender to confirm that the debtor/borrower can repay his/her money, the lender will contact a credit rating agency most times to assess the debtors in order to determine his/her likelihood to repay the debts.

During the course of assessment if the credit rating is high, then that means that the lender can be assured that the debtor will likely keep his promise to pay back and at the stated time. However, if the rating is low or poor it means the borrower has had trouble paying back debts in the past and there is a great probability he/she would not follow his promise of paying back at the stated time or even to pay the complete debt.

Credit rating is what grants the debtor the chance to actually be a debtor i.e. to be granted the loan, not only that but also determines whether or not the debtor will pay the interest on the loan.

With a poor credit rating, it is then based on the lender to risk loaning the debtor or not, because there is a high probability that the main debt will not be paid back less of the interest.

So in business and financial activities, it is very important to be diligent in maintaining a high credit rating because you would not know when you will need an important loan and the main determinant of having that loan is through a credit rating.