Credit Rating

There are two types of credit rating, those that relate to consumers, and those that relate to businesses or to countries.

Credit ratings of consumers are a broad (or ‘coarse’) class of credit scores, which in turn determine risk. Consumer credit ratings fall into 5 bands, one star to five stars, where one star credit rating relates to sub-prime credit customers and a five star credit rating relates to super-accepts and generally undoubted customers. Average risk consumers have a three star credit rating.

In very general terms, the five levels of consumer credit rating are as follows:

One star credit rating – new to credit or with impaired credit, able only to access sub-prime credit offers at approximately twice the cost of the average rate.

Two star credit rating – those rebuilding credit and with adverse credit recorded alongside good credit history, able to access all sub-prime credit and a small amount of mainstream credit, usually at around 150% of the average cost of credit.

Three star credit rating – this is the average credit rating and is the target area for most credit card companies. Those in this credit rating can borrow at average interest rates.

Four star credit rating – generally older consumers or those with long established and good payment history. Able to access almost all types of credit at 80% of the average cost of credit.

Five star credit rating – very stable consumers with impeccable credit history. These consumers are often known as ‘super accepts’ and are able to access credit at between 50%-80% of the average cost of credit.

For companies, banks and countries, credit ratings are given by specialist risk assessors, the largest of which are all US companies - Standard and Poor’s, Moody’s, and Fitch. The credit ratings they use are all different, and are generally expressed in letters, and often the credit rating agencies, as they are called, don’t share exactly the same opinion on credit ratings.

For an example of how one of the credit rating agencies work, Moody’s calculates and provides long-term credit ratings, from ‘Aaa’ to the lowest rating of ‘C’.

In descending order, Moody’s credit ratings start with what is known as ‘investment grade’, and are Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2 and Baa3. Lower credit ratings are then classified as being of ‘speculative grade’ and are Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca and C.

Credit ratings imposed on banks, companies and governments work in broadly the same way that a consumer credit rating affects an individual’s ability to repay debt – the better your credit rating, the easier it is to obtain the credit you need, and at a cheaper level of interest.

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