What Is a Credit Rating?

What Is a Credit Rating?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A credit rating is a numerical representation of an individual’s creditworthiness. It’s a measure used by banks and lenders to assess your ability to repay loans or debts. Credit rating agencies grade you based on your past financial behaviour, including how often you make payments on time, the amount of debt you carry, and how you manage your credit. These grades then form your credit rating. A high credit rating indicates less risk for lenders and can open up more opportunities for you to acquire loans or better interest rates.

Related Questions

1. How can you improve your credit rating?

Improving your credit rating can be achieved by making timely payments, reducing the amount of debt you carry, and avoiding unnecessary credit applications. Consistently demonstrating responsible financial behaviour will help increase your rating over time.

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2. How is a credit rating different from a credit score?

A credit score is a three-digit number derived from your credit history, whereas a credit rating is a measure of your overall creditworthiness. Both are used by lenders to assess risk, but they offer different perspectives on your financial behaviour.

3. Can checking your credit rating affect it?

Checking your own credit rating is known as a “soft inquiry” and does not impact your score or rating. However, when a lender or creditor checks your rating, it’s called a “hard inquiry” and can slightly lower your score.

4. What happens if you have a bad credit rating?

A bad credit rating can make it more challenging to secure loans or receive favorable interest rates. You might also need to pay more in deposits for services like utilities or cell phone contracts.

5. Can you have a good credit rating without a credit card?

Yes, it’s possible to have a good credit rating without having a credit card. Lenders look at a variety of factors, not just credit card use, to determine your creditworthiness. Regularly paying other obligations, like utility bills or student loans, can positively impact your credit rating.