What’s the Difference Between Credit Score and Credit Rating?
What is the difference between credit score and credit rating? These are two terms that are often thrown around with little clarity regarding their specific definitions and the differences between the two. In reality, when it comes to personal finance, a credit rating and a credit score are nearly the same – more specifically, a FICO credit score is a specific type of individual credit rating (and by far the most widely used). In this sense, when dealing with personal finance, ‘credit rating’ and ‘credit score’ are practically synonyms. In corporate finance, however, bonds, securities, or companies (as opposed to individuals) receive credit ratings that are entirely different from the credit ratings (or scores) that individuals receive. Check your personal credit score here:
The Main Difference Between Credit Score and Credit Rating
You may have wondered what the difference between credit score and credit rating is. First, it is important to distinguish between personal finance and corporate finance. For most people, personal finance is where the concept of credit scores and ratings come into play most often on a day-to-day basis. In this context, a credit rating and a credit score are the same, but people often use the term ‘credit score’ to refer to the FICO credit score, which is a specific type of credit score (or rating). As such, a credit score (more specifically, a FICO credit score) is a specific type of credit rating, at least in terms of personal finance. In the realm of corporate finance, however, ‘credit rating’ is the term used to describe the riskiness to investors of a bond, security, or company. (In this context, ‘credit score’ is not typically used.)
Personal vs. Corporate Finance
To understand the difference between credit score and credit rating (as minimal as that difference may be), we should first understand the difference between personal finance and corporate finance. Personal finance is the category that encompasses everything relating to a given individual’s savings, investments, debts, and other financial commitments. In other words, all of the details of your bank account and how you spend (or save) your money are in the realm of personal finance. Corporate finance, on the other hand, encompasses the same types of characteristics, but in the context of a company. So, for example, if a company decides to make (or receive) an investment, that would fall into the category of corporate finance.
Keeping these two contexts separate, let’s first consider the context of personal finance. When a creditor (or lender) is considering providing you with a line of credit – which could take the form of a credit card, an auto loan, a mortgage, or other types of loans – that entity wants to know how trustworthy you are when it comes to paying back your debts. This trustworthiness is quantified in a ‘credit rating’ or a ‘credit score’ (in this case, the two terms are synonymous). The most common credit rating, by far, is the FICO credit score; this is the one that ranges from 350 to 800, and the one that the major credit reporting agencies (Equifax, Experian, and TransUnion) generate automatically, based on information sent to them by creditors. So, what is the difference between credit score and credit rating? Simply put, ‘credit rating’ and ‘credit score’ are synonymous in the realm of personal finance, but the FICO credit score is a specific type within these broader categories, and it’s easily the most important one.
You can check your FICO your credit score, without any penalty, via any one of the three major credit reporting agencies, Equifax®, Experian®, and TransUnion®, or once a year on AnnualCreditReport.com, or by calling 1-877-322-8228.
Credit Rating and Corporate Finance
So, what is the difference between credit score and credit rating in the context of corporate finance? In this context, the term ‘credit score’ is not typically used. The term ‘credit rating,’ however, has a meaning entirely different than the one used in the context of personal finance. In the corporate finance context, a credit rating is a rating given to something in which an investment might be made. This is most often a bond, which is a form of investment structure in which the investor provides a loan to a company (or governmental entity) in exchange for a fixed return in the future. Other types of investment structures (or securities) can also receive corporate credit ratings, as can business entities like insurance agencies. Bond rating agencies, of which S&P and Moody’s are among the most prominent, provide credit ratings to these securities or entities, based on alphabetical grades ranging from AAA to – (for Moody’s) or D (for S&P). So, the difference between credit score and credit rating largely depends on the context in which you’re using the term; in personal finance, the two are practically synonymous, but in corporate finance, where ‘credit rating’ has a specific meaning, ‘credit score’ is not used.
You can consult this chart to see the various grades of corporate credit ratings provided by two of the primary bond rating agencies, Moody’s and S&P.