Is the System of Credit Ratings Fair – Yes

Credit Scores are fair. What is unfair is that people rarely understand the factors that determine a Credit Score. As a result, ignorance fuels frustration.

Many people refer to their credit score as their FICO score or their Beacon Score. Both are accurate but incomplete in their very nature. There are a handful of Credit Reporting Agencies, also known as Credit Repositories. Three in particular are considered to be the most accurate and trusted sources. These three agencies are Fair Isaac, which provides a FICO score, Experian, which offers a Beacon Score, and Transunion, which offers an Empirica Score. While most lending institutions (Mortgage Companies, Banks, Credit Card Agencies) report to all three Bureaus, there are some who do not, and others whose reporting is inconsistent at best. For this reason, there may be discrepancies among the scores reported by each bureau.

Many people think that Credit Scores are simply a reflection of on time payments. While payment patterns are vital in determining an accurate Credit Score, they are not the only consideration. There are five factors that enable bureaus to calculate a Credit Score.

1) Payment History
This is a record of account payment information. This category reflects on all Credit Cards, Retail Loans, Installment Loans, Finance Accounts, and Mortgages. Also falling into this category are any adverse public records such as Bankruptcies, Judgments, Collection, and Liens. Most Accounts remain on a Credit Report anywhere from seven to ten years. While imperfect credit will lose its ability to severely affect a score, the appearance of delinquencies and imperfections will remain visible for several years.

2) Amount of Credit Owing
This category focuses on the proportion of Credit Lines being used at a given time. In layman’s terms, how many Credit Cards do you have and how many are carrying a balance? Do you use your cards frequently? How high are your balances to the Credit Limit? The more accounts with limits within 1/3 of the Credit Limit, the more likely a score will suffer. On the other hand, if there are several credit cards with balances that are low in proportion to their Credit limit, then a much higher number should result.

3) Length of Time Credit Established
Credit Bureaus take into consideration the length of time Credit has been established. In addition, they focus on the activity and use of each Credit Line. A person with a longer credit history has had a greater ability to show his or her creditworthiness.

4) Search for and Acquisition of New Credit
Credit Bureaus look at the number of accounts recently opened, the type of accounts opened, and the number of recent Credit Inquiries.

5) Type of Credit Established
Finally, the Credit Bureaus look at the variety of accounts, whether they are Credit Cards, Retail Accounts, Installment Loans, Mortgage, Consumer Finance Accounts, etc.

Credit Scores are a reflection of Risk. The lower a person’s Credit Score, the Higher the risk to a Lender that he or she will pay bills on time. Lenders therefore cover their risk by means of Interest Rate. The lower a person’s Credit Score the higher the Interest Rate. A person with a Higher Credit Score shows they are responsible with Credit. This proves to be less of a risk to a Lender. People with higher Credit Scores will generally have Lower Interest Rates.

Credit Scores are not unfair; they are a direct reflection of Creditworthiness. Creditworthiness is a complete picture of more than just on time payments. It is a picture of a person’s spending habits, needs, patterns, and passions.