Credit scores are important because they give lenders a fast, objective measurement of your credit risk. Before the use of scoring, the credit granting process could be slow, inconsistent and unfairly biased.
Credit scores — especially FICO® scores, the most widely used credit bureau scores — have made big improvements in the credit process. Obviously there are several advantages of good credit, including better rates or terms and higher chance of approval, but the core purpose of a credit score is to help lenders get a clear picture of your credit history, whether strong or poor. Below are a few credit score benefits regardless of your individual credit score:
Applicants receive loan decisions more quickly. Credit scores can be delivered almost instantaneously, helping lenders speed up loan decisions. Today, many credit decisions can be made within minutes. Even a mortgage application can be approved in days instead of weeks for borrowers who fall above a lender's "score cutoff." Scoring also allows retail stores, Internet sites and other lenders to make "instant credit" decisions. These becomes an even greater advantage when you have good credit since you are more likely to get approved quickly and move forward unhindered with your plans or purchases.
Credit decisions are more fair. Using objective credit scoring, lenders can focus only on the facts related to credit risk, rather than their personal feelings. Factors like your gender, race, religion, nationality and marital status are not considered by credit scoring.
Credit "mistakes" count for less. If you have had poor credit performance in the past, credit scoring doesn't let that haunt you forever. Past credit problems fade as time passes and as recent good payment patterns show up on your credit report. Unlike so-called "knockout rules" that turn down borrowers based solely on a past problem in their file, the purpose of a credit score is to weigh all credit-related information, both good and bad, in your credit report to provide a more holistic perspective to potential lenders.
Precise information leads to increased lending opportunities. Lenders who use credit scores have the confidence to approve more loans, because credit scoring gives them more precise information on risk and other credit factors. A credit score benefits borrowers of all levels since it lets lenders offer a choice of credit products aligned with different risk levels, rather than automatically approving or rejecting an applicant. It allows lenders to identify individuals who are likely to perform well in the future, even if their credit report shows past problems. Since guidelines vary, you may have your loan approved by a second lender if you are turned down by the first.
Learn more about the advantages of good credit and what you can do to improve your credit score from American Express.