A Comprehensive Conceptual Investigation of Credit Rating, Credit Score, and Credit Rating Agency

In this paper, we propose a comprehensive conceptual investigation of the credit rating, credit score, and credit rating agency. We will firstly conceptualize credit rating, including definition, functions, and components. Secondly, we will conceptualize credit score in terms of definition, functions, and components. Thirdly, we will investigate credit rating agency, including definition and functions. Finally, we will provide an empirical review of how these concepts work in practice in the United States.

2. Conceptual review of credit rating
2.1 Definition of credit rating

A credit rating is an assessment of the creditworthiness of a borrower in terms of their ability to repay their debt obligations (Fitch, 2016). Credit ratings are important for both borrowers and lenders as they provide an indication of the likelihood that a borrower will default on their debt obligations. Credit ratings are also important for investors as they provide an indication of the riskiness of a particular investment.

2. 2 Functions of credit rating

Credit ratings play an important role in the financial system by providing information about the riskiness of borrowers and investments (Moody’s, 2016). Credit ratings help to allocate capital efficiently by ensuring that capital is provided to borrowers who are able to repay their debt obligations and by helping investors to identify investments with higher levels of risk. Credit ratings also help to monitor and manage risk within the financial system by providing ongoing information about the creditworthiness of borrowers and investments.

2. 3 Components of credit rating

Credit ratings are based on a number of factors, including the payment history, credit utilization, length of credit history, types of credit, and recent credit inquiries of a borrower (Experian, 2017).

2. 3.1 Payment history

Payment history is one of the most important factors that is considered when assessing the creditworthiness of a borrower. Payment history includes information about whether a borrower has made their repayments on time and in full in the past. A borrower with a good payment history is more likely to repay their debt obligations in the future than a borrower with a poor payment history.

2. 3.2 Credit utilization

Credit utilization is another important factor that is considered when assessing the creditworthiness of a borrower. Credit utilization is a measure of how much debt a borrower has relative to their available credit limit. Borrowers with high levels of debt relative to their available credit limits are more likely to default on their debt obligations than borrowers with low levels of debt relative to their available credit limits (TransUnion, 2018).

2. 3.3 Length of credit history

Length of credit history is another important factor that is considered when assessing the creditworthiness of a borrower. Length of credit history indicates the amount of time that a borrower has been making repayments on credit products. Borrowers with a longer credit history are generally considered to be more creditworthy than borrowers with a shorter credit history. This is because borrowers with a longer credit history have a more demonstrated track record of making repayments on time than borrowers with a shorter credit history.

2. 3.4 Types of credit

The types of credit that a borrower has are also considered when assessing their creditworthiness. Borrowers with a mix of different types of credit are generally considered to be more creditworthy than borrowers with a single type of credit. This is because borrowers with a mix of different types of credit have demonstrated a ability to manage different types of debt obligations.

2. 3.5 Inquiries in the past

Inquiries in the past are also considered when assessing the creditworthiness of a borrower. Inquiries are a measure of how often a borrower has applied for new credit products. Borrowers with a high number of inquiries are generally considered to be more risky than borrowers with a low number of inquiries. This is because borrowers with a high number of inquiries are more likely to be in financial distress and are more likely to default on their debt obligations.

3. Conceptual review of credit score
3.1 Definition of credit score

A credit score is a numerical representation of a borrower’s creditworthiness (Experian, 2018). Credit scores are important for both borrowers and lenders as they provide an indication of the likelihood that a borrower will default on their debt obligations. Credit scores are also important for investors as they provide an indication of the riskiness of a particular investment.

3. 2 Functions of credit score

Credit scores play an important role in the financial system by providing information about the riskiness of borrowers and investments (TransUnion, 2018). Credit scores help to allocate capital efficiently by ensuring that capital is provided to borrowers who are able to repay their debt obligations and by helping investors to identify investments with higher levels of risk. Credit scores also help to monitor and manage risk within the financial system by providing ongoing information about the creditworthiness of borrowers and investments.

3. 3 Components of credit score

Credit scores are based on a number of factors, including the payment history, credit utilization, length of credit history, types of credit, and recent credit inquiries of a borrower (Experian, 2018).

4. Conceptual review of credit rating agency

4.1 Definition of credit rating agency
A credit rating agency is a company that assesses the creditworthiness of borrowers and provides ratings for their debt obligations (Moody’s, 2016). Credit rating agencies play an important role in the financial system by providing information about the riskiness of borrowers and investments. Credit rating agencies help to allocate capital efficiently by helping investors to identify investments with higher levels of risk. Credit rating agencies also help to monitor and manage risk within the financial system by providing ongoing information about the creditworthiness of borrowers and investments.

4. 2 Functions of credit rating agency

Credit rating agencies play an important role in the financial system by providing information about the riskiness of borrowers and investments (Moody’s, 2016). Credit rating agencies help to allocate capital efficiently by helping investors to identify investments with higher levels of risk. Credit rating agencies also help to monitor and manage risk within the financial system by providing ongoing information about the creditworthiness of borrowers and investments.

5. Empirical review

In this section, we provide an empirical review of how the concepts of credit rating, credit score, and credit rating agency work in practice in the United States.

5. 1 The United States

In the United States, there are three major credit rating agencies: Standard & Poor’s, Moody’s, and Fitch (Moody’s, 2016). These agencies assess the creditworthiness of borrowers and provide ratings for their debt obligations. Credit rating agencies play an important role in the financial system by providing information about the riskiness of borrowers and investments. Credit rating agencies help to allocate capital efficiently by helping investors to identify investments with higher levels of risk. Credit rating agencies also help to monitor and manage risk within the financial system by providing ongoing information about the creditworthiness of borrowers and investments.

5. 1. Standard & Poor’s

Standard & Poor’s is a credit rating agency that assesses the creditworthiness of borrowers and provides ratings for their debt obligations (Standard & Poor’s, 2018). Standard & Poor’s ratings are important for both borrowers and lenders as they provide an indication of the likelihood that a borrower will default on their debt obligations. Standard & Poor’s ratings are also important for investors as they provide an indication of the riskiness of a particular investment.
Conclusion:

In this paper, we have proposed a comprehensive conceptual investigation of the credit rating, credit score, and credit rating agency. We have firstly conceptualized credit rating, including definition, functions, and components. Secondly, we have conceptualized credit score in terms of definition, functions, and components. Thirdly, we have investigated credit rating agency, including definition and functions. Finally, we have provided an empirical review of how these concepts work in practice in the United States.

FAQ

A credit rating is a measure of an individual's or organization's creditworthiness. Creditworthiness is the ability to repay debts. Factors that influence a credit rating include payment history, current debt load, and length of credit history.

A credit score is a numerical representation of an individual's or organization's creditworthiness. Credit scores are used by lenders to determine whether or not to extend credit and at what interest rate. Credit ratings are used by investors to assess risk when considering investing in a company.

There are several things you can do to improve your credit rating/score, including paying your bills on time, maintaining a good debt-to-income ratio, and using a mix of different types of credit (e.g., revolving and installment).