Credit Scores: Should Lenders Judge by the Number?The first reason why credit scores should be used as a fair measure to help lenders estimate potential risk is that credit scores are determined who is better qualified for a loan, and it also has a huge i

The second reason credit scores are fair is because credit scores determine if a person is qualified enough to pay the loan back. Credit scores are important to the lender and the individual. Whether society knows it or not, lenders look a peoples credit scores all the time. Lenders look at scores when trying to decide your credit limit on a credit card and they even use it to determine if they will send offers through the mail. The good part about having good credit scores is that it makes financial deals a lot easier and will save a lot of money on interest rates. This proves the reason that credit scores are so vital when dealing with financial health. For all the attention they generate, though, credit scores are largely misunderstood. In the journal, Family Money, Blumenthal indicates that scores matter in life changes events. For instance, ones precise score matters only when they are in need of new loan, like a home, auto or education loan or a new credit card, which should be a fairly rare occurrence (Blumenthal, 2009).  Every time someone receives a bill in the mail and makes a payment, there credit score is affected. If bills are paid on time, one is more than likely to have good credit. All of the spending habits one has obtained over a lifetime, whether it is good or bad, it affects the future of spending it also affects whether a person would or would not be able to rent an apartment or home of choice or be able to qualify mortgage to purchase the home of their dreams.

The third reason credit scores are fair is because credit scores determine at what interest rate lenders are authorized to charge. Each of the three major credit bureaus, Equifax, Experian, and TransUnion, collects data from lenders about each person history of loaning money and paying back credit. They load all of that information onto a credit report, which lenders are able to access whenever a person applies for credit. The Fair Isaac Corp. is the major producer of credit scores. Wilson and Von Bergen, financial journalist broke down the differences in FICO scores to show how they are beneficial in the journal Insights to A Changing World.  They stated that lenders take the information from the three major bureaus and apply their own secret formula to come up with credit scores ranging from 300 to 850. The higher the FICO credit score, the lower the payments (Wilson 2010, p16). Good credit scores can qualify a person for much lower interest rate on bigger loans like mortgage, that lower rate can save you thousands of dollars. Creditors lend money because of the agreement that they will be able to charge interest as a compensation for the risk they are taking.

In conclusion the evidence shows credit scores should be used to determine if there are potential risks that could affect a lenders decision. By using credit scores and credit reports, lenders are able to validate ones credit abilities and the assurance that a loan will be paid back in full and on time. Credit scores in this generation are like a social security number. Some people fall into hardships at time, which is understandable, but knowing how to bounce back from that in order to keep that credit score at a decent range is something some Americans find difficult. Keeping credit scores in good standing will benefit people in the long run. Credit scores define who a person is and it determines how responsible a person is. Credit scores then therefore are a fair measure to help lenders estimate potential risk because it determines the qualifications to repay, it establishes if a person has habit of repaying, and it determines at what interest rate lenders are authorized to charge.

Reference

Blumenthal, K. (2009). Tighter Lending Makes Cracking the System Vital; Benefits of Paying on Time. Family Money .

http://online.wsj.com/article/SB10001424052970204348804574400700026852702.html

Pilon, M. (2009). One in Six Employers Looking At Your Credit Report, Study Finds. The Wallet .

/blogs.wsj.com/wallet/2009/03/11/one-in-six-employers-looking-at-your-credit-report-study-finds/

Tuition, S. (2008). The Smart Way To Choose Student Loans. Know Your Credit Score for Student Loan Applications .

http://www.simpletuition.com/pay-for-college/pay/student-loans/know-your-credit-score-for-student-loan-applications/

Wilson, D., & Von Bergen, C. (2010). Credit Scores in Business: The Good Bad, and Ugly. Insights to a Changing World Journal (4), 1-16.

        http://www.franklinpublishing.net/insightschangingworld.html