How is Credit Rating Done?: Ways to Calculate Credit Score

How is Credit Rating Done?, To understand how is Credit Rating done, we first need to understand what exactly credit rating is! Credit Rating is a rating (a grade, marks, rank or in any other form) an indicator of how credit worthy a person or an enterprise is. You must have seen that all the Banks before sanctioning loans, usually get the credit capacity & credit history of the prospecting borrowers checked. For these reasons, it is must to do their credit rating.

How is Credit Rating Done?

The procedure adopted for doing the credit rating is different for each credit rating agency. But, there are some general steps followed by each agency. Let us have a brief look on the same.

  • Many agencies have their own data bank or data store where they maintain client wise details. With every passing loan enquiry, they keep updating their details.
  • Agencies have their own team of credit analyst. They collect the required information & analze the same. They also prepare score sheets & follow their own check lists.
  • They also contact the client as and when required, discuss the various questionnaires they have.
  • They may also visit the premises of the client to further verify the credit worthiness.
  • In their rating procedural part, they analze both financial characteristics & operational characteristics of any going concern.
  • Not just qualitative factory, they also give due importance to qualitative factors & also reviews legal factors.
  • Basically, assigning a credit-rating is a subjective matter & depends largely on details collected as mentioned above.
  • Once, the rating data is collected, they deeply analyse each & every perspective of it & on the basis of this, final credit rating is determined.
  • This rating is then discussed with the client & after finalization, communicated to him & the interested parties.
  • If the rating is in grades, then A+ indicates excellent credit bearing capacity, A indicates good credit capacity while B indicates average capacity, C indicates poor credit bearing capacity and so on.
  • If the rating is in marks, then depending upon their criteria’s, higher marks would mean excellent credit rating while lower marks would indicate poor credit capability.
  • Generally, its not just the score which is mentioned in a credit report. Reasons for the score along with comments are also stated.
  • Periodically, this information is reviewed & updated. It is the recent credit score which is taken into account.
  • Any defaults made by the client in the previous years, are to be mentioned in the report which will lead our client towards a score which will indicate a higher risk.
  • Also, general guidelines relating to how to read the credit score are given to ease the readability & understandability of the report.
  • The Credit Rating provides a reasonable certainty about the client.
  • Also, It helps to determine what interest rate would be the best for him. Lower risk score would privilege you to get a lower interest rate & higher risk score may lead to a higher interest rate.

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