A lot of us possibly (through our onsite stints) have already heard about credit scores and credit rating and how important and critical it is in the developed countries (like US and the UK) to have a 'Good Credit Score'. For the uninitiated, here's the lowdown.
Whenever one takes a loan (car, home, personal, credit card), the person is using the simplest of monetary transactions called 'credit '. The credit can be from any lender (any financial institution) who charges a fee (interest rate) on a loan.
The ability to re-pay (your income) gets you a loan from the financial institution (bank). The interest rate is dependent on your credit score, the tenure of the loan and the type of loan. Loans can be secured (backed or collateralized by an asset) or unsecured.
A home loan is a secured loan as the asset is the property for which the loan is taken. Any purchase on a credit card is an unsecured loan.
A credit score has many inputs:
- amount of credit (loans / credit cards) you take and existing debt
- your repayment track record
- type of loans taken
- number of times you inquire for a loan / credit card
- length of credit history
Typically credit scores are in the range of 300 to 850. Higher the score better is your credit score or rating.
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