Why Do We Even Have Credit Scores?

We all know it is important to establish and maintain a good credit score but do you understand why we even have to deal with credit scores in the first place? Why does a simple three digital number make such a big deal to your finances?

Here is an overview of why credit scores came about and why they matter to you.

What Does a Credit Score Do?

When you want to take out a personal loan, a mortgage, finance a new vehicle, or open a line of credit, the lender or creditor needs to know that you are credit-worthy in that you know how to manage credit and have proven yourself capable. The way to do that is through a credit scoring system. By using the three digit number, a creditor or lender can look in a single glance and determine whether or not you should be considered. Of course credit applications involve more than that but the score is usually a telltale sign that someone is worth dealing with financially.

Before credit scoring systems were used, the process for approving a credit application was much lengthier, much slower, and much more unfair; unfair because loans and extensions of credit were decided on primarily by marital status, gender, race, and even religion. Loan and credit approvals are also faster because approval can be done in a few hours rather than weeks for applicants who have excellent credit scores. All creditors are able to make faster decisions and in some cases even instant decisions.

Credit scores of today also allow for mistakes to be erased faster. While most bad credit marks against you are reported for a period of 7-10 years, you can effectively boost your own credit over time and not have to continue living under the stigma of past credit mistakes. You can not erase the bad but you can certainly improve the good.

More Credit Now On Hand

Credit scores help lenders make good decisions. In turn, there is more credit available to borrowers. Lenders can make faster credit decisions based on a credit score and decrease the risk of loan or payment defaults. Lenders can also help borrowers who have score less than their standard score receive financing. Lower interest rates are also possible because more credit is available and lenders are not facing as many expenses throughout the approval process as they had in the past.

Your credit score is an essential asset to your financial stability and your ability to secure financing when you need it most. Your credit score is also now being used to assess the risk of insurance claims on auto insurance and by employers to gauge their reliability. Your credit score matters more than you may realize so start working today to repair your credit and boost your score through regular on-time payments and better management of your current financial obligations.

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