Home > Credit 101 > The Hidden Benefits of Credit Scores

Comments 0 Comments

In my recent Credit.com column, Credit Score Obsessed? Don’t Be, I likely surprised many readers by recommending that consumers pay less attention to their credit score and focus their credit management energies on their credit report. This column is likely to be more expected because I want to offer what I believe is good and beneficial about credit scoring. The benefits of a good credit score are relatively well known. Lenders and other institutions that use credit scores are more likely to offer better terms and lower-cost credit to those who have high credit scores. But other consumer benefits from credit scores aren’t as well known. In fact, credit scores have played a role in lowering the cost of credit and expediting the credit application process, to name just two of the advantages they afford consumers. In the U.S., manual credit underwriting was an incredibly arduous process before the introduction and widespread use of credit scores in the late 1970s and early 1980s. It was common to wait 30 days to find out whether you were approved for a loan—or even a credit card.

Back in those days, lenders would have hundreds—or sometimes thousands—of loan officers across the country individually evaluating credit files. These loan officers would obtain copies of applicants’ credit files and use a combination of their own judgment and corporate criteria to interpret the credit file. Their personal interpretation of consumer credit files was part of the loan decision. It is difficult to apply fair and unbiased judgment in a uniform manner under this scenario.

[Credit Check Tool: Try Credit.com’s Free Credit Report Card]


Credit.com’s Credit Report Card
Check your credit bureau profile for free with this great tool. See your detailed credit evaluation, expert advice on managing your credit, and unlimited free updates every 14 days.
Get Started Here »

About 30 years ago, use of credit scores became the norm and lenders gained the ability to expedite underwriting so that consumers could walk into a car dealership and drive out with a car. The automation provided much needed objectivity and dramatically improved efficiency.

In fact, according to a study from the Information Policy Institute referenced in a 2007 TransUnion white paper, 84 percent of automobile loans received a decision within an hour, and 23 percent of automobile loans received a decision within 10 minutes.

The era of waiting days for a loan decision is thankfully over, but that’s not to say that credit scores can or should take the place of prudent underwriting. Credit scores contribute to, but are not a substitute for, sound underwriting practices. Credit scores should be a part of any decision process for credit approval, but not the sole criterion. Credit scores provide lenders with consumers’ likelihood to pay based on previous behavior, but do not provide lenders with an indication of consumers’ ability to pay. Lenders can accomplish this by obtaining additional information such as employment status and income.

[Related Article: What’s a Credit Score? Really.]

It’s not just the time savings that credit score models provide. Lenders have stressed that costs go down when credit scores are used effectively. In 2008, Jack Forestell, Senior Vice President at Capital One Financial Corporation, testified in front of the Subcommittee on Oversight and Investigations, which is part of the U.S. House of Representatives Financial Services Committee, and said, “Credit scores help us extend credit to a full range applicants, including those in underserved populations. In addition, using credit scores in conjunction with automated models makes our underwriting more efficient, which ultimately drives down the cost of credit for our customers.”

Mr. Forestell’s comment is applicable today. Right now, we’re in an environment of protracted lending—particularly in the mortgage market. With a limited number of loan applicants and originations, lenders need to broaden their lending targets without creating risk uncertainty. Here again, credit scores are part of the solution.

[Featured Products: Compare credit score, report, and monitoring plans at Credit.com]

According to a 2006 Brookings Institution study, between 35 and 54 million adults in the United States live outside of the credit mainstream. Many of these consumers are assumed not to have credit histories, or are considered “thin file” by other credit scoring models. There is no uniform definition of “thin file,” but many typically interpret that to mean a consumer with fewer than three accounts in one’s credit file. Using VantageScore Solutions data we’ve learned a couple of things: of the tens of millions of people who were previously considered “thin file,” 15.5% were found to fall into super-prime or prime credit bands. That means somewhere between 5.5 and 8.5 million people who may be thought to have little or no credit history, could actually have really great credit. (Vantagescore provides a score to consumers who had activity up to two years ago on at least one of the credit accounts in their file, whereas traditional credit scoring methods generally require that the activity is not older than six months.)

Two final thoughts: Credit scores, when properly applied, help match consumers with the right kind of credit. And finally, they provide an incentive for consumers to practice healthy financial decision-making…and that’s good for all of us.

This story is an Op/Ed contribution to Credit.com and does not represent the views of the company or its affiliates.

Image: Ksayer1, via Flickr

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team