PeA FinTech Syllabus – Credit scoring and rating: what is the difference?
Rome, 26 October 2018 – Broadly speaking, financial operators tend to distinguish credit scores from fully-fledged ratings on the basis of the kind of data analysed and the methodology is applied. A Credit score is a numerical mark based on historical information such as financial reports, sector of activity and payment habits; lower scores correspond to a higher probability of default. Credit scores are obtained through a purely quantitative and automatic analysis: the only responsible thereof are specialized software performing mathematic calculations and applying pre-established systems, with no place for human intervention.
On the other hand, ratings are based on the figure of the rating analyst, whose spectre of analysis goes beyond a mere faithful application of statistical models, performing broader evaluations on qualitative elements such as the firm’s business plan, its financial planning, the most recently stipulated contracts, the prospectus of the central credit register, the list of suppliers… In other words, a rating is a perfected version of a credit score, encompassing the former and adding to mere mathematical analyses of the past an evaluation of future elements through human lenses. Differently from scores, ratings are expressed in letters organized on a defined scale.
The difference between credit scores and ratings is recognized also by the European legislation. Regulation (EC) No 1060/2009 gives a separate definition of “credit rating” (“an opinion regarding the creditworthiness of an entity, a debt or financial obligation […], issued using an established and defined ranking system of rating categories”) and “credit score” (“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”) respectively in article 3, comma 1, letters a) and y). These definitions faithfully follow the most accepted opinion held by financial operators.
There is a difference of regime concerning credit scores vis-a-vis credit ratings. Since the aim of Regulation 1060/2099 is “to protect the stability of financial markets and investors” (Whereas n. 7) “credit scores, credit scoring systems or similar assessments related to obligations arising from consumer, commercial or industrial relationships” are excluded from the scope of the Regulation pursuant to article 2, comma 2, let. b) thereof; that is, any simple evaluation based on statistics pertaining to non-financial obligations. With this spirit in mind, those private ratings issued on an individual basis and not meant to be shared with third subjects are also excluded from the scope of the Regulation (article 2, comma 2, let. a) Regulation (EC) 1060/2009).
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