What is a Credit Score? Why is it important?

Introduction to Credit Score

With the changing market dynamics, the way people lend is also changing. A ‘credit score’ is one of the parameters of modern lending dynamics. Now, credit score determines your financial life i.e. ability to secure loans, bargain for interest rate and even determines the ability of individuals for any formal agreement or association.

A credit score is the numerical value assigned to an individual based on the credit assessment and credit worthiness of the individual. Creditworthiness is assessed based on the factors like income, credit history, debt levels, and overall financial stability. There are different parameters for determining this score for different entities. Some of the factors that influence the this score are:

Individual Credit ScoreFirm Credit Score
Payment HistoryPayment History
Credit UtilizationDebt to Income Ratio
Length of Credit HistoryBusiness Credit History
Credit MixCredit Utilization
New Credit ApplicationPublic Record and Legal Compliance
Public Image and Negative InformationIndustry and Business Risk
Financial Performance
Credit Inquiries
Trade references and Supplier Relationships

In behavioral terms, it reflects the past financial behavior of an individual and the ability to manage debt responsibly. Generally, a it is a three digit number. Understanding about the this score will empower individuals and enable individuals to make informed financial decisions and help individuals to build a strong foundation for a safe financial future.

Credit Score Range

There is no defined approach to determine the range of credit score. Different countries follow different credit scores from different credit reporting agencies. Some of the credit score range from know credit scoring models are :

Credit Score ModelCountryCredit Score Range
FICO ScoreUnited States300-850
Vantage ScoreUnited States300-850
Equifax Credit ScoreCanada300-900
TransUnion Credit ScoreCanada300-900
Experian Credit ScoreUnited Kingdom0-90 or 0-710
Credit Bureau SingaporeSingapore1000-2000
Schufa Credit ScoreGermany0-100
CIBIL ScoreIndia300-900
Experian Credit ScoreAustralia0-1000

Importance of Credit Score

Knowing and maintaining the score is one of the important financial decisions of today’s financial landscape. Now, a credit score is significant while applying for a loan, credit card, mortgage, rental agreement, purchasing vehicles or applying for a job. Similarly, financial institutions noticeably rely on the score while assessing the risk factor for lending money, determining interest rate and credit limits. Some of the importance of credit score are:

Lending Loans

A credit score is a determinant factor during lending loans. A good or higher credit score is essential or ideal for obtaining loan approvals from banks and financial institutions easily. This score determines the factors like mortgage requirement, interest rate, credit limits during lending loans.

For instance, a high score is most likely to secure a loan at a favorable interest rate with good credit terms. Meanwhile, a low credit score has a probability of loan rejection or loan acceptance at higher interest rate or credit terms.

Interest Rates

Credit score affects your interest obligation in your lending. Lenders assess the credit score to determine your risk. A higher credit score is good risk and lenders often lend at comparatively lower interest rates. Similarly, a good credit rating or score may bag auto loan, housing loan at affordable interest rate. It is essential to maintain good credit risk in order to save money over the life of the loan. Lending companies fight for a client with a good credit score while lending and you have the better chance of getting the best interest rate deal.

Credit Card Approval and Limits

In modern based economy, credit score is essential even for credit card approval and maintaining credit card limits. High credit score is likely to get approval of premium credit cards, lavish discounts and timely coupons and other benefits. Such high score clients enjoy higher credit limits which allows greater purchasing power and financial freedom.

Rental Applications

In any developed economy, the rental approach to housing and property is quite common. Credit scores are taken into consideration by landlord and property management companies while reviewing or assigning any rental deals. A good credit score has a high chance of easy approval for rental properties and provides better negotiation opportunities and lease deals. While in case of lower rental income, chances of getting rental deals without proper reference or high security deposit is difficult.

Employment Opportunities

In certain industries and countries, credit rating is an essential document while applying for any job opportunities. Hiring process in any job requires a credit score to understand the financial responsibility of the candidate. A strong and high credit score means the candidate is financially ethical, reliable and responsible. A high credit score candidate has high ethics and is trusted during different financial events. This will have a positive impact on the job prospects.

Building Financial Reputation

With such wide application and importance, credit score has become an integral part of an individual’s identity. It reflects the financial freedom one can enjoy or lack  for maintaining credit score. Along with it, credit score provides leverage for better borrowing terms and rental opportunities. Creditworthiness is another factor for better financial reputation. A good score leads individuals to opportunities and benefits.

Utility and Service Deposits

A credit score sometimes determines the fate of any special contracts. While entering into any kind of social or professional contracts, parties may require to present the credit score for review. A good credit score may lead to less security deposits or may negotiate for security deposits. Also, individuals with good credit scores may enjoy the premium excess to different utility services. Along with this, a positive credit score always reflects the trust and reliability in the individual.

  1. The Financial Express
  2. Nerd Wallet

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