Score, scoring or… credit scoring?
The terms ” score “, ” rating ” or ” rating ” are often used in an undifferentiated manner to qualify a credit or solvency risk assessment, but these concepts are distinct and need to be well defined to avoid confusion.
These two concepts have a common objective of measuring the risk of insolvency. However, their application and construction methodology are not the same. Moreover, the score can also measure a risk of default.
The score, also called by the Anglo-Saxons, “scoring”, or “credit scoring”, is determined by an automatic and statistical calculation model. It is based on an algorithm, and the exploitation of data, without any human intervention. As part of the calculation of this indicator, there is therefore no intervention by a financial analyst.
It can be produced by companies themselves or by providers, such as companies specializing in business information. It can also be produced internally by banks and insurance companies for their own use. For this purpose, it is based on a statistical analysis of the data available to them.
The score is therefore generally used by SMEs or ETIs to assess the financial health of their customer or supplier counterparties. This indicator, often backed by financial ratios, contributes to decision-making.
Financial rating, rating or… credit rating?
On the other hand, the financial notation is very different from the score. The term “notation” is the French translation to refer to what Anglo-Saxons call “rating” or “credit rating”.
Who has never heard or read the acronyms of the notes “AAA” and other “BBB”, these sesames so much coveted by both companies and states? And for the neophytes, who says notation necessarily says Standard & Poor’s, Moody’s and Fitch, the famous “Big 3”.
As will be understood, rating is an indicator of the credit quality of a financial instrument or its issuer, whether it is a company, a state or a local authority (definition of the EU Regulation 1060/2009 on rating agencies).
Unlike the score, calculated on the basis of a statistical model, the rating is produced by an analyst who takes into account both quantitative and qualitative data. Human intervention is therefore an integral part of the scoring process.
Financial rating or credit rating is generally sought by large listed companies. However, its scope increasingly covers medium-sized companies, the famous “Mid Caps”.
Indicators used for extra-financial?
The current trends related to corporate social responsibility and the ESG criteria (Enterprise, Social, Governance) are conducive to the emergence of new indicators. Whether they are scores or ratings, these evaluations are already produced on these themes. It is therefore not to be excluded that the existing confusion around these terms in the financial analysis is very similar for the extra-financial.
