To be more specific – statistical data shows that there is a very good connection between your grade (i.e. your credit score) and the likelihood of you making payments on time in the next two years. The better you behave financially – the higher your score is – the less risk you represent to lenders.
Credit scores are calculated using an algorithm. The one most commonly used is called FICO, with over 90% of all financial institutions using it to process your applications for loans, credit, mortgages, insurance, cell phone, rent and even job applications.
The basic principle of credit scores is: your credit history + your current credit standing are a good predictor of the future.
There are three Credit Reporting Agencies (CRA) that collect consumer information, process and sell it to potential lenders and service providers. The 3 major credit bureaus are Equifax, Experian & TransUnion.
When you apply for credit, loan or any similar service, the first thing a potential creditor does is to pull your credit reports and scores from the three major credit bureaus to process your application.
Because of this the government has enacted the Fair and Accurate Credit Transactions Act (FACT Act) – that regulate the business of handling consumer information and give you certain rights.
One very important such right is that everyone is entitled to receive a free copy of their credit report from each of the 3 major credit bureaus every 12 months (See free-annual-credit-report.html for more information). You are also entitled to get your credit score upon request, but not for free. Credit score is a product, and as such it cost money.
For more information on credit scores what they mean see what-do-credit-scores-mean.html.
Hope this helps.