Are Credit Scores a Scam?

If you’ve ever had trouble getting approved for a loan or a new credit card then you might feel like you’re being targeted or like the system is set up to prevent you from getting the money you need when you need it. It’s easy to see why some people believe that the credit score system is set up to make sure consumers are tied to their debts and past bad financial decisions for as long as possible. The average consumer understands enough about credit scores to get by but they don’t have a lot of information, which can leave them confused and feeling like they’re being taken advantage of. Especially when there are so many unanswered questions about the systems that produces credit scores.

• Why do financial mistakes from the past still greatly and negatively affect your ability to get credit now?
• Why do lenders focus so much on your credit score and not on income and assets?
• Why is it so hard and why does it take so long to build or rebuild a credit score?

When it’s all said and done the lower the credit score the higher the interest rate and the more profit a lender will make. Without delving into conspiracy theories too much, credit scores do help lenders make money. Don’t be too offended as they aren’t targeting you specifically. What a lot of people don’t understand is that lending money is a business, not a free service. So while the high interest rates you keep on being offered might be inconvenient, not being able to get any kind of a loan or credit is a lot more inconvenient.

How Lenders find Borrowers

As we discussed above, lending money is a business just like a grocery store or your local coffee shop. Most legitimate lenders aren’t out to “get you” or prey upon the consumer, they simply want to provide a service that is needed. But unfortunately, just like they might be lenders whose intentions aren’t great there are borrowers whose intentions aren’t good either. To find the right kind of borrowers a lender has a few things they must do, including:

• Provide credit to a lot of people. In order to be a successful business. a lender needs to provide a large number of people with credit. The number obviously depends on the lender but no matter the exact size there is risk involved.
• Deal with the risk. No matter how many “good” borrowers a lender has there will always be a few who can’t or won’t pay back a loan. So lenders need to decide if a potential borrower carries too much risk, this is where the credit scores come into play.
• Be competitive. Consumers want the best rates so lenders need to be competitive in order keep their client numbers high.

How Credit Scores are used by Lenders

Credit scores are an effective and efficient way for lenders to make a quick but informed decision about a potential borrower. When lenders are able to make quick decisions they are in return able to make a lot of them which allows more borrowers to get their loans or credit faster. Credit scores are important and they will help determine whether or not you get approved and for how much, but they are also only one part of the process.

Credit scores are confusing and therefore consumers feel alienated from them because they simply don’t understand them. Do some research and find out for yourself what credit scores are all about, as a consumer it’s best for you to be as informed as possible.

Just remember that lenders want to lend money it’s how they maintain their business. Alienating borrowers to the point of not wanting to borrow anymore is not the end game of a lender. Lenders don’t use credit scores to simply exclude certain people just because they feel like it; they use credit scores to find the right kind of borrowers who will benefit from obtaining a loan or credit.

For more information on who looks at your credit report, click here.

What can the Borrower do

While it might seem like all lenders are out to reject you, when it comes to getting a loan the ball is in your court. You’re the only person who has control over your money and how you spend it, and you’re the only person who can negatively or positively affect your credit score. Taking an informed and positive approach towards your credit score is the best financial decision you’ll ever make.

If you’re an adult, have a job, or a family then a good credit score is essential. Ignore the conspiracy theories and put your energy into building a credit score you can rely on. Pay your bills on time; make sound and responsible financial choices and work hard to get the score you want and need.