The True Value Of Credit Rating
The concept of credit rating is as important as any other aspect
of credit cards. Well, maybe even more important than a lot of
other features. As you use your credit card, the credit card
supplier maintains not only the history of the transactions you
do (which he uses for billing purpose) but also your payment
history, credit limit used, etc. These details are then passed
on to credit bureaus that use all this information to arrive at
a credit rating for you. This rating is updated on a periodic
basis and is available to other credit card companies on
request. You can also obtain a copy of the same from the credit
card bureaus.
So how is this credit rating used? What is its importance?
Credit rating is used by the credit card companies, banks,
financial institutions and others for judging your credit
worthiness i.e. whether you are worthy enough to receive credit
(loans etc) from them. So when you apply for a mortgage or a car
loan with a bank or a financial institution, the first thing
they will do is get your credit rating from the credit bureau.
If you have a good credit rating then the approvals will be
smooth as butter. However, a bad credit rating might lead to
either rejection of your loan/mortgage application or land you
with a not-so-good deal i.e. higher interest rate, lesser loan
amount or just some difficult terms and conditions.
With a bad credit rating, you might not be able to get another
credit card or might land up with a debit card i.e. a secured
credit card which requires you to open a savings account with
the credit card supplier and your credit limit is basically the
amount (or 70-80% of the amount) you hold in the savings
account. The importance of credit rating can also be judged from
the fact that some of the companies have a credit rating check
done as a part of their recruitment process. They use your
credit rating as a measure of how responsible you are. Amazing,
isn't it?
However, the good news is that maintaining a good credit rating
isn't that difficult at all. It requires just some discipline on
your part. This basically translates into controlled spending
and timely payments.
Controlled spending: A lot of people consider credit card as
free money, not realizing that it is actually just borrowed
money. So first thing is to get this understanding correct and
the next thing is to control your urge to spend on your credit
card. Use cash some times so that you keep away from building
upon your credit card debt. Do not fall for all those offers
that are displayed throughout the shopping centers. They are
there as a marketing tactic to encourage spending. Remember that
these offers come and go all the time so this is not the last
time probably. Ideally, your spending must never surpass 70-80%
of the total credit limit available on your credit card. A
history of overspending on credit cards also leads to a bad
credit rating
Timely payments: Never default on your credit card bill payments
(or on the payments of any other loans etc). Not only do you end
up paying late fees and interest on them, these are also the
ones that spoil your credit rating to a great extent. You need
to keep track of your monthly statements and in fact enquire
with the credit card supplier if you don't get the statement for
a particular month. Once you know what your billing cycle is,
you should make a note of the same in your diary. The next thing
of course is to make sure that you make the payment (unless you
can't really make it). If you have enough in your bank account
and a regular income, you could set up a direct debit where-in
the credit card bill automatically gets paid from your bank
account.
This will give you an idea about the importance of credit
ratings. It really can't be emphasized enough.