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Your credit rating is a measure of your ability to fulfill your financial obligations. It is based on your borrowing and repayment history, your assets and extent of liabilities.
Credit ratings are not only applied to individuals but to companies, states and countries also.
Personal Credit Rating
Creditors use a credit rating system scale of 0-9 to rate your credit worthiness. The numbers are preceded by the letter R or I. "R" refers to revolving credit and "I" to installment credit.
With revolving credit, you are only required to make minimum monthly payments (e.g. credit cards) while with installments, the loan is paid back at a fixed number of equal sized payments over a period of time.
Each creditor you have issues its own credit rating on you. For example, VISA can issue you a credit rating of R1 while MasterCard may give you an R3 if your payment was 60+ days overdue.
Although this credit rating system is still in use, the single digit FICO score has gained increasing popularity in rating an individual's credit risk.
- R0 or I0 means you are new to the credit world and you do not have sufficient credit history to determine your credit risk.
- R1 or I1 means you pay your credit back within 1 month. This is the highest level of credit rating and simple put, it says that you pay you bills as agreed.
- R2 or I2 means you pay your credit back in 2 months. You are 30+ days past due.
- R3 or I3 means you pay your credit back in 3 months. You are 60+ days past due.
- R4 or I4 means you pay your credit back in 4 months. You are 90+ days past due.
- R5 or I5 means you paid or pay over 4 months (120+ days) past the payment deadline.
- R7 or I7 means you consolidated to pay off your loan. In other words, you took out a loan to pay off your other debts.
- R8 or I8 means that the debt was cleared by repossessing the item.
- R9 or I9 means that the company has written your debt off as a bad debt. It is the worst credit rating your can get and indicates your inability to repay your debts.
Corporate Credit Rating
Credit ratings for companies, states and countries help you determine if investing (e.g. buying government bonds, corporate bonds, CDs or preferred stocks) in them would be a wise decision by providing an objective
assessment of their credit risk. Corporate Credit Rating determines the credit worthiness of a company. There are three major credit rating agencies for companies
and they are Moody's, Standard and Poor's (S&P's) and Fitch IBCA. Fitch IBCA has a rating similar to that of S&P's. Credit ratings range from one of highest investment
grade to of junk grade which is in default. The credit rating system used by Moody's and S&P's respectively is Aaa and AAA which has the highest investment grade with the lowest
credit risk; Aa
and AA; A and A; Baa and BBB; Ba, B and BB, B;
Caa/Ca/C and CCC/CC/C and finally C and D which a junk grade with the highest credit risk of "In default".
Sovereign Credit Rating
Sovereign credit rating is that given to a country and determines the level of risk in investing in the country. It reflects a country's political stability, economic status and much more. A sovereign credit rating is one of the first things an investor looks at when determining whether to invest in a country. As such, in other to attract foreign investment, most countries strive to obtain a high credit rating.
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