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What are the types of credit rating?

Credit rating is an analysis of financial instruments, securities, companies, banks, states and countries. In simple terms, it is assessing the creditworthiness of an organization or country or state. The process of rating an instrument involves analyzing financial risk, credit risk, and business risk of the entity being rated. Credit ratings help in assessing the creditworthiness of the borrower.

Following are the types of credit ratings:

Rating of bonds and debentures: Credit ratings are quite popular among bonds and debentures. Almost all credit rating agencies publish their ratings for bonds and debentures.

Rating of equity shares: Rating of equity shares is not mandatory in India as yet. But ICRA has a system formulated for equity rating. Also, SEBI doesn’t have any immediate plans to have credit ratings of initial public offerings (IPOs).

Rating of preference shares: Preference shares in India are not being rated currently. However, since 1973, Moody’s Investor Service has been rating preference shares. Also, ICRA has provision for it.

Rating of medium term loans (Public deposits, CDs, etc.): The credit rating agencies rate the fixed deposits taken by companies.

Rating of short-term instruments [Commercial Papers (CPs)]: Since 1990, the credit rating companies have been rating short term instruments like commercial papers. CRISIL, ICRA and CARE provide ratings for these instruments.

Rating of borrowers: Rating of borrowers, maybe a company or an individual is known as borrower’s rating.

Rating of real estate builders and developers: Ratings of private real estate developers and builders is to ensure that they will properly complete the project. CRISIL rates builders and developers.

Rating of chit funds: Chit funds are rated based on their ability to make timely payment to subscribers. In India, CRISIL provides credit rating of chit funds.

Ratings of insurance companies: Insurance companies ratings are on the basis of their claim paying ability (whether it has weak, moderate, adequate or high paying capacity). ICRA does the rating of insurance companies.

Rating of collective investment schemes: Collective investment schemes are schemes those that pool and collectively invest funds from a large number of investors. The credit rating of these schemes implies whether the scheme will be successful or not. ICRA does credit rating for collective investment schemes.

Rating of banks: Historically, cooperative and private banks have been failing in India. The credit ratings imply the bank’s ability to repay its depositors. CRISIL and ICRA provide credit ratings for banks.

Rating of states: States in India are now being rated. The ratings show whether they are fit for investment or not. Good credit ratings will be able to attract investors from abroad and within the country as well.

Rating of countries: Foreign lenders and investors, often analyze a country’s repaying capacity and willingness to repay their loans. They want to make sure that investment in a country is profitable or not. Following are some of the factor considered while rating a country: its industrial and agricultural production, government policies, gross domestic product, rate of inflation, etc. Morgan Stanley and Moody’s are currently doing rating of countries.

How do I improve my credit rating?

In order to improve their credit rating, one must be consistent in making the payments. Ratings primarily accumulate credit repayment history of a borrower. Therefore, a payment delay affects the ratings. One must be consistent while making payments. For example, paying credit card bills, loan instalments on time, and ensuring that the credit card debt never exceeds the balance.

Following ways will help in improving the credit rating:

  • Pay bills on time
  • Set reminder for all payments and practice discipline with credit
  • Pay off debt and keep low balances on credit cards and other revolving credits.
  • Maintain older credit cards for a long credit history
  • Customize credit limit
  • Have a longer tenure when taking a loan
  • Avoid taking too much credit. It results in multiple enquires.
  • Check the credit report for any mistakes and rectify them.
  • Create a credit history by having different types of credits

Can you reset your credit score?

There is no possible way to reset the credit score. The main purpose of the credit report is to evaluate the borrower against their credit history and help lenders to make their decision. Clearing history negates the main concept of it. However, one can aim to improve their credit score through regular and timely payment, but this takes time to improve the score. Following are some ways to rebuild the credit score:

  • Pay bills on time.
  • Try to keep most of the credit limit available
  • Get a secured credit card; these cards require an upfront deposit amount.
  • Avail secured loans
  • Get a family member or friend as a co-signer for the borrowings.

To get back, a good credit score takes time. The time to improve a credit score depends on the reasons and mistakes. Missed or late payments, judgments and collections stay on the credit report for up to seven years. At the same time, a bankruptcy stays even longer, for up to ten years. However, one can repair the damages right away. Start accumulating positive credit information that helps to counter the big negatives.     

Published on November 9, 2020