Understanding the Different Types of Credit Rating Agencies

blog-credit-score-credit-ratingIf you have been paying attention to credit rating news lately, you will have noticed it isn’t just important to the individual person. Cities like Jacksonville, FL and even the country of France receive credit ratings. From both of these articles, the impacted rating is from the Fitch Group’s Fitch Ratings, and they are based on letter grades rather than a score.

 

Does this mean you should be concerned about your Credit Rating from Fitch Group or the other credit rating agencies? Before we answer this question, here is an explanation of the two types of credit agencies.

 

Big Three Credit Rating Agencies

The Big Three Credit Rating Agencies are Fitch Group, Moody’s, and Standard & Poor’s. The Credit Rating Agencies issue a rating for a debtor based on their ability to pay off debt or risk of default. However these debtors are corporations and non-profit organizations, and cities, states, & nations. As well, individual state offices can have a different rating than their state as is the recent case in Washington.

 

While these ratings are still based on probability of default, the range is a grade. For all three, the highest grade is Aaa or AAA, which represents a prime entity that is not likely to default. While the grade is different between the three, a C, D, DD, or DDD means the entity is in default.

 

Big Three Credit Reporting Agencies

Generally when you think of the “Big Three” Credit Reporting Agencies (also referenced as credit bureaus), you think Equifax, Experian and Transunion. However, as discussed above, the credit bureaus are different from the credit rating agencies. While both create credit ratings that predict the likelihood of an entity to pay their debts as agreed, the credit bureaus focus on the individual consumer instead.

 

Credit bureaus take a number of different data points in your credit report, such as length of credit history, amounts owed and payment history, to generate the FICO ® score using a mathematical algorithm created by FICO. This score typically ranges between 850 at the highest and 300 at the lowest where higher scores reflect lower risk. Each lender determines what is a “good score” rather than the credit bureaus  or FICO itself.

 

To answer the question above: no, you should not be concerned about YOUR credit rating from the rating agencies as an individual does not receive a rating, but you should be concerned with your credit score. That said, given the recent financial developments in Detroit, you may also want to look up your own city’s credit rating as it could provide insights into the financial health of your community which likely has an effect on your taxes, public schools, and general services you expect.

 

Michael Cohen is the Content, Community and Social Media Manager at myFICO.com.

Comments

  1. Is it possible for you to do a post on the breakdown of scores and their corresponding AAA, AA, A, B, C, etc grade? In the last year I was told I was a “B” when I opened a cell phone account yet have a FICO of 730 with no defaults. I’d like to understand that better.

    • Michael Cohen says:

      Unfortunate I am not an expert in the specific score the cell phone company uses, but to help you out: a general rule of thumb (not official) is a 760 and above could be considered A. High 600s to 750 could be considered B, and so on.

      Also, the comment of a “B” might have been an internal measurement, based on this rule of thumb, and not an official rating.

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