Credit score and credit history are often confused. Why are they not the same thing and how are they different?
Credit history is information about a specific person, that is, the subject of credit history who fulfills credit obligations. The credit history is based on data transmitted by the sources of the formation of the credit history: creditor organizations, federal executive authorities, or arbitration managers who carry out the bankruptcy procedure of an individual.
Credit history is stored in the credit bureau (CRB). This means that your credit history can be stored in one CHB or several at once. There is no single CHB with which all banks are obliged to cooperate.
Credit history itself consists of four parts:
- The title part contains standard general data about the subject of credit history: full name, passport data, TIN, and SNILS.
- The main part carries the information about current loans and court decisions that have entered into force on the collection of funds, bankruptcy, as well as the borrower’s scoring score (if the BKI calculates it).
- The informational part carries the information on what applications the person submitted for a loan and the result of consideration: whether the loan was issued or not.
- The closed part is visible only to the borrower. It lists everyone who has ever requested the subject’s credit history and who submitted information to it.
Based on the credit history, a credit report is formed which reflects its content.
There are some things that might not help build your credit, but can definitely hurt it. For example, cell phone companies don’t typically report to the credit bureaus, unless you’re late on your payments. Additionally, short-term lenders don’t typically report to credit bureaus unless you’re late on payments. So if you took out a small 300 dollar loan from https://moneyzap.com/small-loans/300-dollar-loan/ and you paid it back, it likely won’t affect your credit score either way, but when you miss a payment or pay late, it can cause your credit score to fall.
A credit rating (or credit score) is an assessment of the creditworthiness of a borrower based on information from a credit history. The higher the score, the more trustworthy the client is. The credit rating can be specified in the credit report or provided as a separate service.
Currently, the BCH is not required to calculate the borrower’s credit rating. This is done at the discretion of the bureau. Credit rating is inextricably linked with credit history. Since information about loans is scattered across different bureaus, each bureau evaluates the subject of the credit history based on the data that it has.
Credit scores allow you to rank issuers of securities and individual bond issues according to the level of credit risk. The higher the score of the issuer or bond issue, the lower the probability of default.
In the global financial industry, credit scores are an integral part of making important financial decisions in the debt capital market. The largest international agencies whose ratings are respected by investors around the world are Standard & Poor’s, Moody’s, and Fitch Ratings.
In 1913, John Knowles Fitch opened Fitch Publishing which publishes financial information. Thanks to its close relationship with the NYSE and the popularity of print media, Fitch has become a leader in providing analytical information to both internal and external investors. Today this company is known as Fitch Ratings.
Fitch’s international scale is very similar to that of the S&P agency. However, the scores assigned by these agencies to the same issuer or issue of debt securities may differ. The table below lists all possible credit ratings on the Fitch scale with a brief description of their meanings.
Scores from AAA to BBB are considered reliable and are classified as investment grade. Anything below has questionable creditworthiness and falls into the non-investment (speculative) category. You can also separate the RD and D scores which means a fait accompli of default.
This separation is used for regulatory purposes. Some financial institutions such as pension funds or government agencies may only be allowed to invest in investment-grade securities.
It should be noted that the RD rating is not always a harbinger of bankruptcy and the assignment of a D rating. Issuers with an RD rating can avoid bankruptcy by restructuring debt by agreement with creditors or through government assistance.
Together with a credit score, the agency can indicate the forecast of the rating score movement in the future:
- Positive forecast – credit score is likely to grow;
- Negative forecast – credit score downgrade is likely;
- Stable forecast – credit score is likely to be at the same level;
- An evolving forecast – credit score is likely to move in any direction.
In addition to the international scale, Fitch can assign national scale ratings. These scores reflect the solvency of an individual issuer relative to other issuers in the same country.
The national scale of long-term solvency ratings is identical to the above international one (except that the short country identifier is indicated in brackets after the rating).
The maximum national rating corresponds to the international rating assigned by the state. For example, the sovereign is assigned at the BBB level. This means that the national AAA score will correspond to the BBB on an international scale.
The agency can also assign short-term national ratings to issuers. Investment ratings in it have a gradation from F1 (highest reliability) to F3 (sufficient reliability). Speculative ratings are similar to those of the international scale in order of deterioration in credit quality: B, C, RD, D.
It is calculated on the basis of five main points:
- timely repayment of loans;
- loan diversification (loans of the same type are bad);
- length of credit history;
- age. It is difficult to get a loan before the age of 22 but it is easier to get a loan from the age of 28;
- the time interval since the update of the credit history (fresh loans have a stronger effect on the GPC).
There are three main levels of credit scores:
- 701-850 points: an excellent indicator. Holders of such a rating can expect to receive a loan on more favorable terms, a large loan amount, and bonuses as well;
- 600-850 points: a good indicator. You can count on standard lending conditions in any bank and a low probability of failure.
- 300-600 points: a satisfactory or poor indicator that increases the risk of refusal, as well as worsens the conditions for issuing a loan.
When calculating scores, all the records of the credit history from the moment of its formation are taken into account. The average credit rating is 632 points.