Benefits of Credit Scores

Credit Scores: An Overview of Benefits

Credit scores are primarily for the benefit of a lender, insurer, or employer. These scores give them an idea of the risk level of applicants for loans, credit cards, insurance claims, and everything from reliability to dishonesty on the job. While not everyone with a low credit score is a high risk, statistically the number is a good predictor of future behavior based on the past of an individual.

Understanding the Mechanics of a Credit Score

A credit score is based on your history, but remember that it excludes your personal data such as income, religion, personal preferences, etc. The resulting score is an amalgamation of the following data:

Past delinquency          35%
Use of credit                30%
Length of credit history 15%
New credit inquiries      10%
Credit mix                   10%

The resulting score can help or hurt you, depending on where it falls compared to averages and means. For instance, the national mean credit score, which is a number that splits the population of credit scores exactly in half, is currently around 723. This means half the population has scores above that number and half has scores below 723. If you have scores of around 720 and higher, your credit score will help you because you will be perceived as lower risk.

Credit Score and Lending Risks

The way your risk is perceived is also based on other statistics: the rate of delinquency for each percentage division. For instance, those in the highest scores of 800 and up, which account for 11% of the population, have a 1% delinquency rate. On the other side of that scale, only 1% of the population falls into the lowest scores (300-499). However, 87% of those people are delinquent in payments. That’s a huge difference.

Quick Approval

A good credit score, an excellent credit score will allow you the ability to obtain quick and in some instances even instant loan approval. This can be very important to a person who is looking for financing or an extension of credit.

A More Objective Evaluation of Your Credit History

The FICO score has proven to be a step in the direction of providing a more objective evaluation of a person's credit history. While not perfect, it does present some standards that make it easier to form a less subjective evaluation and determination about a person's credit history.

Another Benefit of a Good Credit Score: Lower Auto Insurance Rates

A good credit score may also mean your insurance company sees you as low risk. Although being fought by some consumer groups, insurance companies claim they have statistical evidence that those with lower credit scores make more claims. They may also consider a person who doesn’t follow the rules on payments, etc., to be a higher risk concerning rules of the road.

Employers and Your Credit Score

Employers who do credit checks on potential employees also may choose the one with the better credit score, thinking the person would be more responsible and more honest as well. Those in security professions and management could be especially affected by the credit report.

Summary

Your credit score can hurt or help you in many ways. Take good care of it, and check its accuracy often.