Role of a Credit Score

The role of credit scores in assessing credit worthiness

A few years ago I would have approached this topic much differently. I would have talked about how credit scores would have had a limited role in the assessment of credit worthiness.  However, after a collapse of the financial markets, which is due in part to the relaxed lending standards of institutions, I see there is evidence that proves this scoring system to be flawed. 

After doing some research on how a personal credit reporting agencies(Experian, Trans Union, or Equifax) were willing to expose their equations.  Their reasoning? They are “for-profit” companies and the scoring model is their unique product.  Each of them, the three previously listed, has a different way to calculate “risk.”  So, for instance, due to different formulas for calculation, it is possible a person could have a 700 credit score from one agency, a 560 from another, and 600 from the other. This scenario, however unlikely it may seem, is all too common due to reporting and data entry errors. 

My personal experience, before I corrected a number of errors (83 in total) on all three bureaus, is very similar to the previous example.  My information was mixed with some of my relatives and another person which shared my same name.  It took almost 5 years and hundreds of dollars to correct these errors.  This seems unfair since it only takes a few wrong keystrokes to create the error.  These errors caused undue embarrassment and stress not to mention the indirect loss of money due to higher interest rates, as those rates are generally based on that score.

Although the credit agencies state that your credit file is based on information received from sources such as places you have applied for credit, subscriptions to magazines, media companies such as the cable  and phone companies and the IRS, all too often this vital information is getting mixed up with some other persons information. I was a victim of these circumstances and since these scores are a major determining factor in one’s ability to obtain credit, my chances of getting approved for a credit purchase was greatly reduced.

It is also very important to note that each time you apply for credit the lender has made an agreement, based on the lowest cost to the lender, with one of the three major agencies. Initially I thought the reason lenders use different agencies is that their headquarters are based in different regions of the U.S. so they used the agency they are most familiar with, I was disappointed to learn it was based on cost. Knowing that each agency displayed different information and that my ability to obtain credit at a low interest rate, or even to obtain credit, is based on information that, after some investigation, I found to be false is still very unsettling.

In my experience I would have to conclude that credit scores, although they may be artificial due to false information, have a large role in determining person’s credit worthiness.