Credit Reporting

Growing up, my parents stressed the point of starting off with good credit and maintaining a good credit score as this can be a means to purchase those things you can not readily afford. Being young and naive I believed that the only way to be part of the “good credit” crowd would allow me to purchase whatever I want, when ever I wanted it, sounds great doesn’t it? Then I got older and started working for a bank, that was when I begun to realize that having a good credit score was not as important as I thought it was.

Over the past several years I have worked in a capacity that affords me the ability to know more about credit reports and credit reporting than most. Credit scores are based on a scale of 850 (being the best) to 350 (being the worst) and because there are 3 major credit reporting agencies, those scores can vary at any given time. Each agency, named Transunion, Equifax, and Experian, assigns a credit score to your Social Security number based on several factors. This number can go up or down at any time due to changes in credit limits, requests to see your credit bureau, percent of credit used, on time payments and so on. The equation to get to this number is not only different for each credit reporting company, but also is a secret so lenders or consumers will not know how it is figured.

Knowing what I just explained, you would think that the credit reporting system is fair and each person has a shot at maintaining a good credit rating if they are responsible right? Not really, let me explain. Due to the complexity of the calculations, your credit score is more effected by the bad (a late payment, excessive amounts of requests for new credit, or high balances to credit limits) than if there is something positive that happens. In my own personal example, I had a 750 credit score received a 30 day late payment (the credit bureau only reports a payment that is over 30 days plus late as a “bad” mark on the credit report) and my credit score will go down as much as 150 points and moving them from a very little risk consumer to a medium risk consumer thus allowing for banks to lend to this customer at, instead of a 6% interest rate, a interest rate between 11% and 15%. That was 7 years ago, just this year after not missing any payments and only taking out one new credit card, my credit score is back above 700. Hardly seems fair doesn’t it? Remember this credit reporting agencies are for profit entities, not non-profit as you may think; their jobs are to make lenders money so the lenders will continue to use their services.

So why doesn’t your score matter? In today’s battered credit markets, companies are moving away from credit score lending, which is what brought on the economic down turn, to doing traditional underwriting where a person looks into the person’s actual credit history, not just their score. So if are concerned about how your credit score has been affected due to charging up your credit card or obtaining additional lines of credit, you can breathe a little easier. However, I would like to say that adding debt and charging up additional credit to the limits is not ideal and can cause other stresses, so I do not suggest doing this.