residential mortgages

What if credit scores did not exist?

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As a pick-up from yesterday (click here) regarding why credit scores are so important I thought I would offer another side of credit scores:  What if credit scores did not exist?  Having worked with borrowers for more than a decade I can tell you that a credit score is a real data point that banks and lenders have to know to determine what type of risk a borrower might be.

A credit score is the result of many different factors including the following:

1. Past payment history: bankruptcies, late payments, past due accounts and wage attachments

2. Amount of credit owing: amount owed on accounts, proportion of balances to total credit limits

3. Length of time credit established: time since accounts opened, time since account activity

4. Search for and acquisition of new credit: number of recent credit inquiries, number of recently opened accounts

5. Types of credit established: number of various types of accounts (credit cards, retail accounts, mortgage)

You credit report will show a bank or lender (or you) all of the credit that a person currently has and how it has been managed.  The above points are mathematically averaged and weighted to derive your personal credit score and this is not something you could figure out on your own.

As mentioned yesterday, every time someone (a banker, broker, specialist, etc.) checks your credit – your score goes down.  Don’t let other people check your credit.  Get a copy of your own credit report and give it to them to use until you are ready to move forward with them on an actual transaction.  If they don’t know how to use the credit report you give them, find someone who does because you should not be risking your credit score unnecessarily.

You can check your credit score here and get a copy of your personal credit report to make sure it is correct.

So if credit scores did not exist, banks and lenders would have a difficult time determining how well someone has historically managed their credit.  Keeping in mind that because a credit report is a historical reflection of past activity it doesn’t offer any indication of the future – hence the risk.  But banks and lenders are comfortable to some degree believing that history is a good indicator of the future.

“The farther backward you can look, the farther forward you are likely to see.” ― Winston Churchill

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