Role of Credit History
People all over the world have grown increasingly dependent on credit. Owing to this factor, it is vital to understand your personal credit reports, as well as your credit score. Here are a few pointers on the definition of a credit score, why it is important, and how you can maintain a good credit score.
When you are borrowing money from a financial source, the funds are basically allocated to you based on your credit limit, which you must repay in a month’s time. If you default on repaying that amount of money, it starts to reflect badly on your credit score, which in turn would lower your credit limit in future. A credit score, therefore, is a statistical method that determines how likely a person is to repay the borrowed credit. Similarly, when you borrow from a financial institution, your bank sends data to a credit bureau, which in turn, sends a credit report of how well you’ve handled your debts in the past. Using this credit report, the bureau generates a credit score on the basis of a few factors.
These factors that determine an individual’s credit score include the person’s credit card history, a check on whether he/she has any pending debts, the duration for which the person has used credit, the types of credit held by the person, and how often the individual has applied for new credit forms.
There are various ways by which you can improve your credit score, especially if it’s low. However, the optimum way to ensure that your score increases is by maintaining a history of debts that are paid on time. Other options include avoiding debts, maintaining low levels of borrowing, having a long credit history, and abstaining from applying for more credit.
Although credit score is instrumental in understanding your credit limit, it hardly ever plays a role when you are using a credit card. If you borrow money in excess using a credit card and default on the repayment of that credit, it affects negatively on your credit score, but you can still go on using your credit card in the following months. Credit reporting provides for stores to accept cheques, banks to issue new credit cards, and for many companies to keep functioning efficiently while generating employment for people. Perhaps the most important facet of a credit score is that lenders use it to see if you’re a potential credit risk.
This goes on to mean that when a loan is granted to an individual, who has a low cred it score, he/she will be charged a higher interest rate on the borrowed money, as compared to someone who has a higher credit score. Simply put, this individual will end up paying more money if you have a low credit score – and nobody really wants to be subjected to this.
All in all, the best way to maintain a strong credit score is to minimise debts, and if you do have any debts, then to pay them off within as small a time frame as possible.