The concept of credit rating is as important as any other aspect of credit cards. Well, maybe even more important than a lot of other features. As you use your credit card, the credit card supplier maintains not only the history of the transactions you do (which he uses for billing purpose) 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 periodic basis and is available to other credit card companies on request. You can also obtain a copy of the same from the credit card bureaus.
So how is this credit rating used? What is its importance?
Credit rating is used by the credit card companies, banks, financial institutions and others for judging your credit worthiness i.e. whether you are worthy enough to receive credit (loans etc) from them. So when you apply for a mortgage or a car loan with a bank or a financial institution, the first thing they will do is get your credit rating from the credit bureau. If you have a good credit rating then the approvals will be smooth as butter. However, a bad credit rating might lead to either rejection of your loan/mortgage application or land you with a not-so-good deal i.e. higher interest rate, lesser loan amount or just some difficult terms and conditions.
With a bad credit 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 hold in the savings account. The importance of credit rating can also be judged from the fact that some of the companies have a credit rating check done as a part of their recruitment process. They use your credit rating as a measure of how responsible you are. Amazing, isn't it?
However, the good news is that maintaining a good credit rating isn't that difficult at all. It requires just some discipline on your part. This basically translates into controlled spending and timely payments.
Controlled spending: A lot of people consider credit card as free money, not realizing that 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. Use cash some times so that you keep away from building upon your credit card debt. 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. Ideally, your spending must never surpass 70-80% of the total credit limit available on your credit card. A history of overspending on credit cards also leads to a bad credit rating
Timely payments: Never default on your credit card bill payments (or on the payments of any other loans etc). Not only do you end up paying late fees and interest on them, these are also the ones that spoil your credit rating 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. Once you know what your billing cycle is, you should make a note of the same in your diary. The next thing of course is to make sure that you make the payment (unless you can't really make it). If you have enough in your bank account and a regular income, you could set up a direct debit where-in the credit card bill automatically gets paid from your bank account.
This will give you an idea about the importance of credit ratings. It really can't be emphasized enough.
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