Credit Score Basics: What It Is and Why It Matters

A credit score is a numerical representation that may be used by lenders and other financial institutions as one factor when evaluating a person's credit history and borrowing profile. The exact scoring method and its use can vary depending on the institution and applicable system.

What Is a Credit Score?

A credit score is generally based on information related to an individual's credit history. Financial institutions may use credit-related information as part of their assessment when considering certain credit products.

Why Does a Credit Score Matter?

When a person applies for a loan, credit card or another credit product, the lender may evaluate several factors. Credit history and credit-related information can be among those factors.

A lender's final decision may depend on its own policies and evaluation process. A credit score alone does not guarantee approval or rejection.

Factors That May Affect Credit History

• Repayment history.
• Existing credit obligations.
• Credit utilization and outstanding balances.
• The length and nature of credit history.
• New credit applications or enquiries.
• Information reported by relevant financial institutions.

Importance of Timely Payments

Making repayments according to agreed loan or credit terms can be an important part of responsible credit management. Delayed or missed payments may have consequences under the applicable agreement and may affect credit-related records depending on the reporting system.

Managing Credit Card Balances

Credit cards can provide convenient access to short-term credit, but it is important to understand repayment requirements, interest, fees and other applicable charges.

Keeping borrowing within an amount that can be comfortably repaid may help support better financial management.

Checking Your Credit Information

It can be useful to periodically review your credit-related information for accuracy. If you identify information that appears incorrect, follow the relevant process provided by the credit information provider or institution to request clarification or correction where available.

Common Habits That May Support Responsible Credit Management

• Pay dues according to agreed terms.
• Keep track of outstanding loans and credit obligations.
• Avoid borrowing more than you can reasonably repay.
• Understand interest rates, fees and repayment conditions.
• Review credit-related information periodically for accuracy.
• Consider the purpose and repayment ability before applying for additional credit.

Common Misunderstandings

Similarly, different institutions may use different information and assessment methods when making lending decisions.

Credit Score and Responsible Borrowing

A useful approach to borrowing is to consider both the immediate need for funds and the ability to manage repayments over time. Before taking additional credit, review your income, regular expenses and existing financial commitments.

Questions to Consider

• Can I comfortably manage the repayment amount?
• Do I understand the interest rate and applicable charges?
• How much outstanding debt do I already have?
• Do I need to apply for additional credit?
• Have I reviewed the terms and conditions carefully?
• Is my credit-related information accurate?

Key Takeaways

• A credit score is generally related to an individual's credit history and reported credit information.
• Lenders may consider multiple factors when making credit decisions.
• Timely repayments can be an important part of responsible credit management.
• Managing existing obligations and understanding borrowing costs is important.
• Reviewing credit-related information periodically can help identify possible inaccuracies.