If you ever applied for a loan or made a big purchase, then you must have come across the term ‘credit score’. Your credit score determines how willing a bank or other financial institution is to lend you money. It helps the lenders decide whether you can pay off the loan or not. It’s the collection of information about how you handle your debt.
Let’s find out more.
Broadly speaking, a credit score is a three-digit number calculated on an individual or business’ credit history that measures the creditworthiness of a person or company. It’s based on credit report information obtained from credit bureaus or credit reporting agencies. This is used by banks and credit card companies to evaluate the potential credit risk and informs their lending decisions. If you’re applying for a car loan, home loan or privately consolidated student loan, then having a good credit score can pave the way for you in getting the loan approved. A high a credit score means a positive credit report, while a low credit score means a negative credit report.
The information used to calculate the credit score includes your credit balance, credit limit, account type, payment history, account status and records of foreclosure, bankruptcy, tax liens and repossessions.
• Credit scores speed up loan decisions. The instant credit decisions make the loan approval procedure faster. It saves time as many loan applications are sorted within minutes through this information.
• Defaulters and bankrupt companies are identified easily with the help of credit scores. It reduces the chances of committing mistakes while approving loans. Individuals and companies with poor credit performance are then restricted from getting loans.
• Credit scores stop unfair credit decisions. By using the credit scores as the base, the lenders can take decisions without getting influenced by other factors like gender, religion, race or nationality.
• Improved credit scores help businesses get best rates and terms. If you’ve got a good credit score, then you can save a lot of money on interest rates. Businesses with high credit score are likely to pay less interest per month as compared to companies with a low credit score.
A credit score grades the credit health of a company. You can improve your score by paying on time, handling your debts properly and not using too much credit. Maintain a good score and get favourable lending rates and terms.
For more information about credit scores, check out Understanding Your Credit Report and Credit Score, published by the Government of Canada.
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