What is a credit score and why is it important?

What is a credit score, how is it calculated, and why it is (or is not) important?

What is a credit score?

Let us take a personal example in order to understand what is a credit score. We do not know each other. You have extra money that you are willing to lend in return of interest expectations. Apart from asking me details like my salary, my other debt obligations, my employment history; you will want to know have I taken loans from others before, and if yes then have I paid them back on the agreed terms and conditions (payment history).

In addition, you would want to know if I borrowed as much money as they were willing to give me, or my ‘needs’ were less than what I could have borrowed (utilization).

In addition, you would like to know how long have I been borrowing from others (age of credit history), you might want to know in total how many times have I borrowed and how many of the loans are still active (total accounts), you might want to know how many loans did I take recently.

And finally, you would like to know how many loans did I ask for (credit inquiries) and if I have any public records that might be of relevance (civil litigation where I was asked to pay damages, or previous loans that went into collections).

This is exactly the way anyone lending money to anyone will think, and the banks are no different. Banks are professional money lenders and a credit report lists all of the facts that we listed above (saying you might want to know).

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