What is Credit Quality?
Credit quality is a measure of an individual's or company's creditworthiness, which is ability to repay debt.
How Does Credit Quality Work?
A FICO score, which is created and calculated by the Fair Isaac , is a measure of an individual's credit quality. It is a mathematical summary of the information on a person's credit report. Bond ratings are measures of the credit quality of companies that bonds. These ratings can also be assigned to insurance companies or other entities or securities to indicate riskiness.
FICO scores range from 300 to 850. The higher a person's score, the more creditworthy that person is. The best interest rates tend to go to borrowers with FICO scores above 740, but this is a generalization. The FICO-score algorithm considers several things in determining credit quality: payment history, the amount owed, the length of the person's credit history, the amount of borrowing capacity and the types of debt the borrower uses. The three major credit bureaus (Experian, TransUnion and Equifax) each collect information about a person's credit quality, so it is possible for a person to have three different measures of credit quality (i.e., three different FICO scores).
Moody's and Standard & Poor's (S&P) provide a service to investors by grading the credit quality of issuers based on current research. The rating system indicates the likelihood that the default either on interest or capital payments.agencies like
- For S&P the ratings vary from AAA (the most secure) to D (for default).
- For Moody's the ratings go from Aaa to C, which means the is likely already in default.
Only bonds with a rating of BBB or better are considered 'investment grade.' BBB bonds are considered to be suitable for by institutions. Anything below the triple-B rating is considered to be junk, or below investment grade. are revised periodically based on recent data. Treasury bonds are are backed by the 'full faith and credit' of the United States government and are thus considered of the highest credit quality because the government has the power to levy in order to pay its debts.
Why Does Credit Quality Matter?
quality also has a huge influence on the price and demand for certain . The lower the quality, the riskier the and the less the is worth. This is why downgrades (or rumors of downgrades) in an 's can have a significant impact on its and on the or industry.
Ultimately, however, improving a person's or a company's debt balances low, avoiding unnecessary , avoiding opening a of new accounts at a young age, checking one's for mistakes and judiciously using accounts.quality generally centers on a few concepts: paying bills on time, getting current and staying current on bills, keeping