During most of the 20th century, credit came from personal knowledge. The local banker knew his customers personally and knew instantly who was a good risk and who was not. Today the world is more complex and impersonal. Individual credit decisions are made with the help of computer software programs, mathematical equations, and information generated from credit bureaus. Most lenders have no personal knowledge or contact with the actual borrower and consumer, and they base their credit decisions entirely upon objective data provided by credit reporting companies.
In the modern world, in other words, the key to determining credit worthiness is the credit score.
The credit score is a number generated by a mathematical formula based on information provided to the credit reporting agencies and then put into the credit report. Lenders can take one glance at the credit score and determine whether borrowers are considered to be in the high risk, low risk, or excellent credit category. They assign the consumer to that status and use it for all credit and loan decisions.
But that’s not all. Lenders are not the only ones who use your credit score to judge you. These days the credit score system is also used, for example, by landlords who may decide not to rent to you if your score is too low. Even employers will run your credit history and determine whether or not to hire you when you file a job application. They may not call you back and you will never realize that it was not because you were not qualified for the position but that you lost out just because they didn’t like your credit history.
Lose a job and income and accidentally write checks that bounce, forget to pay bills on time, go over the limit on a credit card, or get behind on mortgage or car payments and the credit score and credit history are severely damaged. Then you’re out looking for a new job or a new place to live and you find that your credit score creates new obstacles that make it even harder to gain financial traction. Those are some pretty serious reasons to keep tabs on your credit history and follow smart strategies to preserve your credit score while raising it even higher at every opportunity.
