What Are The Advantages And Disadvantages Of Credit Rating?
With the help of credit rating, one can get reliability and creditworthiness. Through the rating, the financial history, the assets and liabilities are represented. It further shows the recommendations for purchasing or holding any debt instrument.
However, the credit rating does not guarantee the perfect real-time credit score. Rather it keeps on changing, depending upon the information received. Fortunately, it is still possible to do debt instruments by credit rating through bonds, debentures, bank loans, etc.
Credit rating impacts real-time credit score: Advantages and disadvantages
There are several advantages and disadvantages of credit rating. The advantages of credit rating are associated with both the investors and the company.
Advantages of credit rating:
1. Providing security against bankruptcy:
The rating that is provided by the credit instrument is given by the credit rating agency. This helps them to decide the financial strength of the individual and also the risk fact that he/she can intake. This also reduces the chances of bankruptcy.
2. Understanding of the risk:
A person who is managing credit risk must also develop strategies for credit risk management. While investing, the credit rating offers information that can help to overcome these risks and helps in the smooth functioning of the finances.
3. Reduces the cost of Borrowing:
A company with a high rating will always be able to cut off the costs of borrowing money from the public by cutting off the interest rates in FDs, bonds and debentures. The strategy of the investors lets them invest in secured funds even though they get a lesser return.
4. Using rating as a marketing tool:
Those companies that have a rated instrument use it as a way to advertise their image as one of the most appealing and trusted ones while dealing with lenders, customers, constituents and creditors. This can, in turn, have a positive effect on the real-time credit score f the business.
Disadvantages of Credit rating:
1. Having biased ratings and misinterpretations:
While to some people credit rating is a blessing, some take it as a curse in case they don't get a quality rating. Misinterpretations might affect one’s credit scoring
2. A thorough study:
Since the entire rating is based on financial reports and actions of the past, it cannot be called a static study. Due to a change in the political environment, economic situation or governmental policy change, the rating can also be influenced.
Fortunately, the concept of credit rating is developing momentum in recent years, especially in India due to the measures taken up by the government.