Benefits of having a good credit rating include the ability to get the best terms for financial products like loans, which can save a substantial amount of money in the long run.

A credit rating can apply to individuals as credit scores or to corporations and governments as letter grade credit ratings. Learn more about the advantages of having a good credit rating in different scenarios.

Personal Credit Ratings

At the consumer level, banks will usually base the terms of a loan as a function of a credit rating or credit score. This typically means that the better your credit rating, the better the terms of the loan. On the other hand, if your credit rating is poor, the bank may even reject your request for a loan. This can impact your ability to obtain a mortgage or a credit card. Businesses and governments can benefit from high credit ratings as well.

Credit scores are determined by credit bureaus, which are companies that collect consumer credit information and sell it to lenders to help determine a borrower's creditworthiness. The three major credit bureaus in the U.S. are Equifax, Experian, and TransUnion.

If a person has a track record of paying back loans in a timely manner, that individual will probably have a high score. Low credit scores are assigned to people that have a history of making late payments or defaulting on loans. High levels of debt can also decrease an individual's credit score. For that reason, it is important to check your credit score often and pay down any outstanding debt or resolve any issues impacting your credit score so that it can start to increase once again.

Personal credit ratings, or FICO credit scores, range from 300 to 850. A score of 670 or higher is considered to be good, while 740 to 799 is considered to be very good. Scores above 800 are considered exceptional. A poor credit score would be anything lower than 580.

Corporate Credit

At the corporate level, it is usually in the best interest of a company to look for a credit rating agency to rate its debt.

Investors often base part of their decision to buy a corporation's bonds, or even the stock, on the credit rating of the company's debt. Major credit agencies, such as Moody's, Fitch Ratings, or Standard and Poor's, perform this rating service for a fee.

Investors often look at the credit rating given by these international agencies as well as ratings given by domestic rating agencies before deciding to invest. The demarcation line for corporate credit rating is investment grade. Investment grade and above are considered to be less risky, while below investment grade carries more risk but sometimes more reward, particularly through higher yields on bonds.

Government Ratings

Credit ratings are also important at the country level. Many countries rely on foreign investors to purchase their debt, and these investors rely heavily on the credit ratings given by credit agencies. Benefits of a high credit rating include being able to access funds from outside their country and the ability to attract other forms of financing to a country, such as foreign direct investment.

A company looking to open a factory in a particular country may first look at the country's credit rating to assess its stability before deciding to invest. For example, Treasury bills from the United States are considered to be low risk because they carry the credit rating of the United States government. Because the U.S. is a country with a strong economy and low political risk, its credit rating benefits because of these factors.

The Bottom Line

A good credit rating is key to getting approved for the best terms for financial products like mortgages or business loans, which can save you money in the long run. You can improve your credit rating in a number of ways, including reducing your debt load and ensuring you make all your payments on time.