For a long time, credit scores were used mostly by companies offering loans or credit cards to determine how much credit they give consumers and how much to charge for it (interest rates). Now days, many companies other than banks are using credit scores meaning your credit score impacts a lot more than getting a loan at a great rate.
It might surprise you to know that now your credit score can affect your insurance rates, and even your ability to get a job. Many insurance companies and employers now use credit scores to help decide how much to charge for insurance and who to hire. Just like banks, insurance companies and employers need to decide how big of a chance they would be taking to insure or hire you, and many consider higher credit scores to be a good indication of individuals who represent less of a risk.
What’s In a Credit Score?
Basically, you can think of your credit score as an adult, financial version of standardized tests like those that kids take in school. It compares your financial history and habits to those of people who are similar to you in order to determine how worthy you are of receiving credit (or as we just learned -insurance or jobs). Your credit score paints a picture of you, your bill-paying history, how many and what type of credit accounts you have, how much outstanding debt you have, whether you’ve been delinquent with companies, and any actions creditors have taken to collect on your accounts. All of these factors are used to compare you to people with similar profiles using statistical software and points are assigned for each aspect that increases your likeliness to pay back your debt on time.
Who Decides The Scoring System?
A company can use its own system, industry specific models, or generic models to assign scores and assess risk. Certain factors cannot be used to calculate these scores, such as race, sex, marital status, national origin, or religion but otherwise companies can use various elements reflected on your credit report to develop their own system of scoring. For example, an insurance company might decide that a person who pays all of their bills on time but who carries a large debt to credit-limit ratio is more likely to file an insurance claim. This company might decide to give more weight in their scoring system to people with a lower debt to credit-limit ratio than to someone who is very timely with bill paying. In contrast, a credit-card company may prefer to give greater weight in their scoring system to a person who pays their bills on time, but who has a larger debt to credit limit ratio, because they stand a good chance of making more money on interest that way, but without a great risk of not being repaid at all. Because different models and scoring systems can be used, improving your score can depend on what company or entity is using it. However, there are some general recommendations you can follow to improve your score overall. To read more about these recommendations, see our article, Click Here.