The average consumer is pretty unclear on what their credit score is or how it’s calculated. There are a lot of common misconceptions out there about credit scores, one being that each individual only has one score. In fact, there are many scoring models that feed off of your data on your credit report.
In a recent study by the Consumer Financial Protection Bureau, 73%-80% of educational scores obtained from consumer websites are likely to place consumers in the same credit-quality category as a creditor purchased score. However, it was also noted that often at least one of the four scores reported was significantly different than a creditor purchased score.
With the variability in scores and the general misunderstanding of the purpose of credit scores in the first place, many people are calling for changes to the system and that includes lenders. Today, it’s becoming increasingly common for credit scores to not even matter. Here are 5 reasons your credit score may not matter as much as you think it does.
More People Are Using Cash
With the uneasy financial climate throughout the world, many people are losing faith in banks and opting for a cash and carry society. Ceasing the use of credit cards is becoming more common than ever, making credit scores virtually meaningless.
The Economy Is Bad
When the economy is bad like it is, a lot of people default on their obligations, lowering the bar for lender expectations. That means that a “good” score used to be in the 700’s, but now it may be in the 650’s. Likewise, when the economy is doing well, the bar for god scores is raised, making it more important to have a higher score. The variability in what is good and what is bad makes credit scores more meaningless in times of economic strife.
Lenders Look At More Than Just The Number
Lenders are taking into account more than just credit scores. They are also looking at debt to income ratios, behavioral indicators and customized scores that take into account more than what a traditional credit bureau can report. This bigger picture not only gives lenders a better idea of who is credit worth, but it also gives those with faltering scores a better chance at securing a loan.
Credit Scores Change Too Often
Advances in technology have increased the frequency with which scores change. Credit scores can change as often as daily because of new reporting abilities. That means your score today may be invalid by tomorrow, making any given score less meaningful. If you apply for credit and don’t like your score today, you can go home and make a few payments then try again tomorrow and have a different score to work with.
Credit Scores Are Up For Interpretation
Lenders are free to interpret scores any way that they wish. What is considered good by one lender may be fantastic to another or poor to another. Each lender sets their own rules and qualifications when deciding who to loan money to, so while you may get rejected for a loan at one bank, you might be accepted at another at a very competitive rate.
Before worrying about your credit score too much, consider all the reasons your score isn’t as important as you think it is. Taking these points into account will make you feel better about any small fluctuations you experience with your score.