The Concept And Value Of Credit Rating

Compared to any other aspect of credit cards, the concept of credit ratings is equally important, or maybe even more important than a lot of other features.

Your credit card issuing company, does not only maintain a history of the transactions for billing purposes as you use your credit cards, 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 periodically and is made available to other credit card companies upon request.

You can also obtain a copy of the same from the credit card bureaus.

So how is credit rating used and what is its importance?

Credit ratings are used by the credit card companies, financial institutions, banks, and others for judging your credit worthiness i.e. whether you are worthy enough to receive credit or loans from them.

So when you apply for a car loan or a mortgage with a bank or a financial institution, their first procedure is get your credit rating from the credit bureau. If your rating is good, then the approvals will be smooth as silk.

On the contrary, a bad credit rating might lead to either rejection of your loan/mortgage application or land you with a not-so-good deal like lesser loan amount or higher interest rate, or just some difficult terms and conditions.

With a bad 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 have in the savings account.

The fact that some of the companies have a credit rating check done as a part of their recruitment process, indicates the importance of credit ratings. Your credit rating is used as a measure of how responsible you are. Isn’t it, amazing?

However, the good news is that maintaining a good credit worthiness isn’t that difficult at all. All it requires is just some discipline on your part. This basically translates into timely payment and controlled spending.

Timely payments:

Never default on your credit card bill payments (or on the payments of any other loans for that matter). Besides ending up paying late fees and interest on them, these are also the ones that spoil your credit ratings 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.

You should make a note of the same in your diary once you know what your billing cycle is. The next thing of course is to make sure that you pay at once (unless you can’t really make it).

If you have enough in your bank account and a regular income, you could arrange a direct debit whereby the credit card bill gets paid automatically from your bank account.

Controlled spending:

Never consider credit card as free money, In reality, 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.

To keep away from building upon your credit card debt, use cash some times. 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. A history of over spending on credit cards also leads to a bad rating. So, ideally, your spending must never surpass 70-80% of the total credit limit available on your credit card.

This will give you an idea about the importance of credit ratings. It really can’t be emphasized enough.