What's the difference between a credit rating and a credit score?

Credit rating and credit score may be used interchangeably in some cases, but there is a distinction between these two phrases. A credit rating, often expressed as a letter grade, conveys the creditworthiness of a business or government. A credit score, usually given as a number, is also an expression of creditworthiness that can be used for businesses or individual consumers. Certain credit scores (for instance, the Dun & Bradstreet PAYDEX, Experian’s Intelliscore Plus or the FICO LiquidCredit Small Business Scoring Service) apply exclusively to businesses.

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, a mortgage or a 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. These services are paid for by the entity requesting the credit score as well as by the creditor.

When creating a credit rating, all agencies can set their own scales, but the ratings most popularly used are produced by Standard & Poor’s. It uses triple-A ratings for corporations or governments that have the strongest capacity for meeting financial commitments, followed by double-A, A, triple-B, double-B, B, triple-C, double-C, 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 and Moody’s are two other companies that also create credit ratings. The three organizations also assign outlook ratings (negative, positive, stable, under review and default) to countries. These indicate the potential trend in a country’s rating over the next six months to two years.

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. These will give you a general idea of where your credit stands and the factors affecting it, but most lenders look at a FICO score rather than these scores when assessing the creditworthiness of a consumer. (In addition to your credit score, lenders will also consider your income and your total debt, as compared to that income.)

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. Credit scores are typically grouped into ranges like excellent, good, fair and poor.

Each lender will have its own guidelines for granting credit, but generally, scores higher than 720 are considered to be excellent, while scores between 690 and 720 are considered good and express that the borrower is relatively safe. Scores lower than 690 but greater than 650 are fair; borrowers with scores in this range may have a few delinquencies in their credit histories. Scores below 650 are considered poor.

Although scales may vary, the most commonly used scales for both credit ratings and credit scores consider borrowers ranked on the bottom two-thirds of the scale to be risky. Borrowers with FICO scores from 300 to 650, for example, are considered risky, while those with scores ranging from 650 to 850 are considered fair to excellent. Similarly, on the S&P credit ratings scale, borrowers with ratings under triple-B are considered “junk,” while those that fall between triple-B and triple-A on the scale are considered acceptable.