What Is the Difference Between a Credit Score and a Credit Rating?

Lenders and investors assess creditworthiness using different metrics, with “credit score” and “credit rating” often used interchangeably despite referring to distinct evaluations. Understanding their differences helps individuals manage personal finances and assists businesses or governments in securing funding.

Though both measure financial reliability, they serve different purposes and are calculated differently.

Credit Score Approaches

Credit scores predict an individual’s likelihood of repaying borrowed money based on financial history. The most widely used models, FICO and VantageScore, analyze credit reports from Equifax, Experian, and TransUnion. These reports track payment history, outstanding debt, credit history length, account types, and recent inquiries. Payment history carries the most weight, as missed payments signal higher risk.

Lenders use credit scores to determine loan approvals, interest rates, and credit limits. A higher score leads to better borrowing terms, while a lower score can mean higher interest rates or loan denials. Mortgage lenders, for example, often require a minimum FICO score of 620 for conventional loans, but scores above 740 qualify for the best rates. Auto lenders and credit card issuers have different thresholds based on the type of financing.

Credit scoring models evolve to reflect consumer behavior and economic trends. Recent updates emphasize debt management patterns rather than static balances. FICO 10T, for instance, considers whether a borrower consistently pays down debt or accumulates more over time. This helps lenders differentiate between those improving their financial habits and those struggling.

Credit Rating Methodologies

Credit ratings assess the ability of businesses, governments, and other entities to meet financial obligations. Unlike credit scores, which rely on standardized algorithms, credit ratings involve a qualitative review of financial statements, economic conditions, and industry risks. Major rating agencies—Moody’s, S&P Global Ratings, and Fitch—evaluate revenue stability, debt levels, cash flow, and governance practices.

Analysts examine leverage ratios, such as debt-to-equity, to assess how much debt a company carries relative to its equity. Interest coverage ratios measure how easily an entity can meet interest payments based on earnings. Beyond financials, agencies consider economic trends, regulatory environments, and management effectiveness. A government bond rating, for example, may be influenced by fiscal policies, tax revenue stability, and political risks.

The rating process includes direct engagement with the entity being assessed. Companies and municipalities present financial projections and strategic plans to demonstrate their ability to manage debt. Agencies assign ratings reflecting the likelihood of timely repayment, which are periodically reviewed and adjusted based on financial conditions. A downgrade increases borrowing costs as investors demand higher yields for greater risk, while an upgrade lowers interest expenses by signaling improved creditworthiness.

Numerical Ranges vs. Grade Levels

Credit scores and credit ratings differ in format. Credit scores range from 300 to 850, with higher numbers indicating lower risk. Even small fluctuations can affect borrowing terms. For example, a FICO score of 679 might result in a higher mortgage rate than a score of 680, as lenders set thresholds for better terms.

Credit ratings use letter grades to classify debt risk. Investment-grade ratings (AAA, AA, A, BBB) indicate lower risk, while speculative or “junk” ratings (BB and below) signal higher default probability. Agencies refine distinctions with modifiers such as plus and minus signs (S&P and Fitch) or numerical adjustments (Moody’s). A company rated BBB- by S&P is investment grade, but a downgrade to BB+ classifies it as speculative, potentially triggering selling pressure from institutional investors restricted to investment-grade securities.

A decline of 10–20 points in a credit score may not drastically affect borrowing opportunities, but a single-notch downgrade in a credit rating can significantly raise borrowing costs. Credit ratings influence large-scale debt issuance, where even minor adjustments can lead to millions in additional interest expenses. When a sovereign nation’s debt is downgraded from A to BBB, bond yields typically rise as investors demand higher compensation for increased risk.

Entities That Rely on Each

Financial institutions, regulatory bodies, and investment firms use credit scores or credit ratings based on their needs. Retail banks and credit unions rely on credit scores for consumer loan applications, including personal loans, credit cards, and mortgages. Automated underwriting systems integrate scores with other financial data to streamline approvals while ensuring compliance with regulations like the Fair Credit Reporting Act (FCRA). Credit scores also influence insurance underwriting, where companies assess policyholder risk for auto and homeowners’ insurance. Some states restrict their use to prevent discriminatory pricing.

For businesses seeking financing, commercial lenders and trade creditors focus on business credit scores, which differ from personal credit scores in structure and accessibility. Agencies like Dun & Bradstreet, Experian Business, and Equifax Business assign scores based on payment history with suppliers, outstanding obligations, and public records such as liens or bankruptcies. A strong business credit profile improves trade credit terms, reducing the need for upfront cash payments and enhancing cash flow management.

In the bond market, institutional investors, pension funds, and mutual funds rely on credit ratings to guide portfolio allocations. Many institutional investment policies set minimum credit rating thresholds for bond purchases, affecting demand and liquidity for corporate and municipal debt. Regulatory frameworks, such as Basel III for banks and the Securities Valuation Office (SVO) guidelines for insurance companies, incorporate credit ratings into capital reserve requirements to maintain financial stability.