Credit scores give lenders a fast, objective measurement of your credit risk. Prior to the use of scoring, this process could be slow, inconsistent, and unfairly biased. Credit scores, and FICO scores in particular, have made substantial contributions to the credit process.
Because of credit scores:
- People can get loans faster.
Scores are delivered instantaneously which allows lenders to quickly approve or deny loan requests. Many credit decisions are made within a matter of minutes. Even mortgage applications only take hours instead of weeks for borrowers who score above the lenders “cutoff score”. Scoring allows retail stores, internet sites, and other lenders to make instant decisions regarding credit.
- Credit decisions are fairer.
Now lenders focus only on the facts that affect your credit risk and not their personal feelings. Your gender, race, religion, nationality, sexuality and marital status do not contribute to your credit score.
- Credit “mistakes” are less important.
If your credit history is poor, credit scoring makes it so that your past mistakes are not a detriment to your credit forever. Past credit problems become less important as time passes and recent good payment patterns are shown on your credit report. Unlike the “knock out rules” that turn down borrowers based on the existence of past credit problems, credit scoring takes into account all credit-related information, good and bad, in your report and is a more accurate representation.
- More credit is available.
Using credit scoring, lenders can approve more loans because the information they receive from credit scores is a more accurate and precise way in which to base credit decisions It lets lenders identify individuals who are likely to perform well in the future even if their credit report shows problems in the past. Even those whose score is lower than the lender’s cutoff for automatic approval benefit from scoring. Many lenders offer different credit products for individuals with different levels of risk. Lenders have separate guidelines so even if one turns down your loan, another may approve it. The use of scoring gives lenders confidence to offer credit to more people because of the better understanding they have of the risk.
- Credit rates are lower.
With more credit available, the cost of credit for borrowers decreases. Automatic credit processes including scoring makes the process of granting credit more efficient and less expensive for the lenders who can then pass on the savings to their customers. By controlling credit losses through scoring, lenders make rates lower overall. Mortgage rates are lower in the United States than they are in Europe because of the information, including credit scores, available to lenders here. Knowing and improving your score can lead to lower interest rates as well.