Credit Rating versus Credit Score

From Open Risk Manual

Credit Rating versus Credit Score

The difference between the use of the term credit rating and credit score depends on the context of the comparison

  • A Credit Rating is typically a measure used within a broader Credit Rating System that may involve many different credit portfolios and many different approaches to quantifying / assessing Credit Risk and potentially. A credit rating will typically be defined on a limited Rating Scale
  • A Credit Score is a typically a continuous indicator that is produced almost exclusively on a quantitative (statistical) basis. In the context of consumer finance the terms are used interchangeably and may be subject to branding and marketing considerations. Both denote the creditworthiness of an individual borrower
  • In the context of the development of credit risk metrics by analysts, a credit score is typically a quantitative measure (one that may be produced by a scorecard) whereas a credit rating might be the eventual metric used for risk management that potentially uses a credit score as input but incorporates other qualitative information.
  • Credit scores tend to have a continuous (fine resolution) range whereas credit ratings are more discrete
  • Credit ratings are typically also part of an internal Credit Rating System

Regulatory Definition

The distinction between a credit rating and scoring is defined in regulation[1] which distinguishes the two as follows:

Credit Rating means an opinion regarding the creditworthiness of an entity, a debt or financial obligation, debt security, preferred share or other financial instrument, or of an issuer of such a debt or financial obligation, debt security, preferred share or other financial instrument, issued using an established and defined ranking system of rating categories.

The CRA III Regulation also defines a credit score as follows:

Credit Score means a measure of creditworthiness derived from summarising and expressing data based only on a pre-established statistical system or model, without any additional substantial rating-specific analytical input from a rating analyst

References

  1. CRA III Regulation (Regulation (EC) No 1060/2009, as amended by Regulation (EU) No 462/2013)



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