Credit Rating vs Credit Score

 

For most of us, understanding credit reporting is still a mystery. The credit bureaus (Equifax Canada and Trans Union of Canada) collect information on consumers and provide that information to their subscribers (creditors/lenders) in a report format. This information details the credit and payment history, credit inquiries and recent addresses and employers. Credit bureaus do not decide whether or not we will get credit. They only act as a clearing house for the information. Each credit granting company has their own guidelines and policies on how they evaluate the credit information and who they will offer credit to.    

The terms credit rating and credit score are often used interchangeably, but there is a distinction between them. 

 A credit rating is a letter grade given to you as an assessment of your creditworthiness with respect to a particular debt or financial obligation. The debt is coded or “rated” R0 (too new to rate) to R9 (bad debt, collection, bankruptcy). The higher the number rating, the worse the debt profile given to you by that creditor.  In this case, you want to have a rating 1 as it means you pay within 30 days of billing, and you pay the account as agreed.  It also means you, the borrower, is likely to repay the loan in its entirety without any issues.

 A credit score, on the other hand, is a complicated three-digit numerical calculation ranging from 300-900. It is a judgement about your financial health at a specific point intime. It indicates the risk you represent to lenders compared with other consumers.  It is calculated based on your credit report, number of credit inquiries, number of accounts with balances, number of accounts with balances close to credit limits and reporting of serious delinquency on accounts to name a few.  In this case, higher scales on this score are good. The higher the score, the lower the risk to lenders. Lenders extend better interest rates to those with higher scores which translates to savings for you!

Credit scores are never static which means we must remain diligent in maintaining a high credit rating. They change all the time based on the newest data and one negative debt will bring down the best score.