One of the items that is most used in making judgments about your ability to handle credit, and make payments on time is your credit report. Your credit report contains information about how you have handled credit in the past, as well as the lines of credit you have available to you now, and the loans that are open in your name.
Basically, your credit report is your financial reputation. If you aren’t careful, you might find that your reputation is poor, and that can impact your ability to gain approval for a loan. Even if you do end up with a loan, you could end up paying more in interest charges and other costs, because your financial reputation is in question.
The infographic below is from Direct Lending Solutions, and offers an interesting look at your credit report, as well as your credit score.
Is It Fair for Others to Judge You on Your Credit History?
Many consumers don’t think it’s fair to make judgments based on your credit history. Here are two reasons that your financial reputation may not be best served by the credit reporting and scoring industry:
- What if you are financially responsible without the use of credit? One of the biggest flaws that opponents of the credit score industry see in credit reporting and scoring is that you basically have to use credit in order to get a good credit score. While there are some alternative consumer scoring methods that don’t rely on credit, these have been slow to catch on. Many consumers argue that they are very financially responsible without using credit; they pay their rent and utilities on time each month, buy cars with cash, and save up for other purchases. Judging your financial reputation based on financial methods you don’t even use doesn’t seem fair.
- What about circumstances beyond control? Other consumers, no matter how responsible they have been, run into other problems. Even if you live within your means, build an emergency fund, and engage in other responsible behaviors, there are some circumstance that will wipe you out. A huge medical emergency or sickness, or a job loss that leads to foreclosure, are two examples. In some cases, the costs are so high that it isn’t reasonable to expect a “regular” person to be able to cover them, no matter how hard he or she has tried to live in a financially responsible manner. Unfortunately, once that happens, no matter responsible you are going forward, your credit report bears the black mark for years.
Consumer credit reporting is becoming more prevalent in finances, beyond even just loans. Employers might check your credit report (they aren’t supposed to check your score), and insurance companies might base your premiums, at least in part, on your credit score. This means that your poor score puts you at a disadvantage, whether or not you think it’s a fair and accurate representation of your financial situation and reputation.
What do you think? Is credit scoring fair? And do you think credit reports and scores should be so influential in the financial world?
Miranda is freelance journalist. She specializes in topics related to money, especially personal finance, small business, and investing. You can read more of my writing at Planting Money Seeds.