Effects of Credit Ratings

Credit ratings have a significant impact on credit opportunities and costs. If the creditworthiness is insufficient, there is no confidence in the borrower. An application for a loan is then rejected. However, most credit institutions seek discussions with applicants to explain the reasons for the rejection and to show them ways in which they can develop their creditworthiness.

If a loan is nevertheless approved in the case of a poor credit rating, the loan will be expensive for the borrower. This is because the interest rate for loans corresponds exactly to the pricing of the risks arising from this credit commitment. The higher the risks are for the lender, the higher they set the risk-adequate interest rate. For lenders, risks are not negative per se: the higher the default risks, the better the return opportunities.


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