Why is Credit Score Important for Every Individual

What is the importance of credit score? Frankly it is a very basic and Indeed a very good question.

Let’s try to find out the history behind credit scores and how it came into existence. What was the inherent need of having it in the first place?

Bankers and credit card agencies who give loans would like to know the risk they are taking. That in turn also affects the APR they are going to charge. Banks have to provide Non Performing assets at the end of the fiscal year and declare to its shareholders. So each bank had devised a method of trying to find the credit behaviour of its consumer. They had various parameters encompassing the history and length of credit. But it was never standardised.

Later the Fair Isaac Company came up with a scoring model which is very well known in the industry circles as the FICO Credit Score, used by EXPERIAN. This score gives weightage to various consumer behaviour parameters like 35% Payment History, 30% amounts owed, 15 % length of credit history, 10% new credit and 10 % on types of credit used.

Year 2009, the subprime crisis and aftermath have led to a tighter credit market with credit crunch and Banks adopting stricter policy norms.

So what has changed, the banking and credit card companies are getting risk averse. They prefer a much higher score in credit report. Now the logical question would be what this score is. The range varies with the type of loan you are applying and so does the cut off.

Generally, a score of 700+ is considered good for the mortgage related housing loans. A score of 670+ is decent for getting a good deal at the car dealers. The car dealers also tend to ask for a much higher down payment for people who have poor credit rating scores.

It has also been seen that credit reports offered by Credit Rating agencies have as many as 29% serious erroneous reports. 71 % reports have some other error of minor importance. So there is a high probability that your credit report may have a negative which was added by error and so it is imperative that you monitor your credit reports once at least every quarter.

Credit score has been taken as guidance by almost all the major credit card companies and lenders for giving loans and credit cards. It is a negotiating factor during business deals and hence it should be noted by one and all that YOU MUST take good care of having a credit score that is in the higher range.

Credit Score is not a percentage but a percentile and also it is a straight way comparison of apple against apple so You will be compared with a similar background person having similar credit payment history.

Importance of credit score lies in the fact that it brings the extra reliability of payback for the lenders and thereby it increases the chances of you getting a loan.

Credit score is important for securing good loan from a reliable bank which is liquid and has a good market image.

Importance of credit score also lies in the fact that once you have a good credit score, you are assured of a decent APR from a good company. It has actually standardised the process of getting debt and money flow.

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