Credit score is the term given for your credibility based on your ability to settle your present and past debts. If you have been repaying all your debts properly, within the stipulated time, you will get a good credit score. If you default on your payments, you get a bad credit score. The five most important factors that affect your credit score are:
- Current level of debts and repaying capacity
- History of previous credit payments
- Time limit for which debts were in use
- Different kinds of debt available
- Frequency of applying for new debts
Your credit score contains measurements to define your performance towards installment credit, known with a prefix of I (all kinds of loans) and revolving credit, known with a prefix of R (like credit cards). R0 or I0 is the best score and R9 or I9 is the worst score. This is just an example. Different credit rating agencies all over the world have different names for their scores.
Why is a credit score important?
When you apply for a new loan or a credit card or when you apply for a debit/credit card from your bank (like Capital One secured credit card), the first thing that banks check is your credit score. Credit rating agencies all over the world have a huge database containing the credit information of loan applicants. If your credit rating is very low (that is you have defaulted on many payments earlier or currently), banks have the authority to reject your application right away or charge your loans with a higher rate of interest than what a person with a good score gets to pay.
When you have a good credit score you will enjoy the following benefits and services:
- Reasonable interest rates on loans and credit cards
- Ease of approval for housing loans and rental agreements
- Ease of applying for all insurance products