You'd be hard pressed to find a lender who wouldn't check your credit score to determine whether you're a good credit risk before making a loan these days. Though having credit scores does make your life easier in some ways, credit scores also come with drawbacks that limit their usefulness.
One of the biggest advantages (or, if you have a bad score, disadvantages) is that your credit score follows you wherever you go, which means that even if you move from Maine to Miami or Waco to Washington, D.C., banks and other lenders in your new area will get to see how you handled your finances in the past. If you don't have a credit score, it may take you a while to either build a good reputation in your new area or track down letters from your previous creditors stating that you pay your bills on time. With a credit score, you get a decision much faster.
Credit scores help ensure that everyone is evaluated on the same, consistent basis. Factors such as your age, race, marital status, appearance or other potentially discriminatory information do not contribute to your credit score, so lenders can base their decisions on objective criteria. In addition, negative information is weighted equally for everyone, so a lender cannot treat your late payment any differently than the late payment of any other loan applicant.
Video of the Day
Brought to you by Sapling
One disadvantage of a credit score is that as much as it tries, a three-digit number can't encapsulate why your credit history is the way that it is. For example, your credit score doesn't care if you default on your bills because you blew the money on frivolous purchases and then got fired because you didn't show up for work or if you default because your spouse had cancer and the medical bills became unmanageable.
In some cases, credit scoring can be a self-perpetuating cycle because people with good scores receive lower interest rates, making it easier for them to stay current on their payments and further improve their scores. On the flip side, people with poor credit are usually struggling to make payments as it is. With a low credit score, they might not be able to get additional credit and, if they do, will likely face higher interest rates that make it harder to catch up.
- Jupiterimages/Brand X Pictures/Getty Images