Your credit score now plays a role in many areas of your life. From credit card issuers like Discover to websites like Credit Karma, there are plenty of companies clamoring to show you the three-digit number that, in theory, represents your creditworthiness. However, some industry experts say you shouldn’t put too much stock into a single number. While your credit score is important, it alone doesn’t dictate your financial future.
[Read: 10 Simple Ways to Raise Your Credit Score.]
Credit scores: a lender’s first impression. Almost all lenders use a credit score to form their first impression of an applicant’s financial situation, says Jason Flemish, vice president of global consumer care for credit reporting bureau Equifax. But that doesn’t mean the score alone is the deciding factor when it comes to making a credit decision. “I like to think of it as a weight,” Flemish says. “I can give you my weight, but it’s not necessarily an indication of my health.”
In addition to the score, lenders will often review the details of a person’s credit history as well as their past relationship with the company. “Most credit card companies have custom models,” says Jeff Richardson, spokesperson for credit scoring agency VantageScore. These models may take into consideration whether a person is a current customer, their payment history with the company and similar factors.
Once credit is approved, lenders may pull people’s credit scores or histories regularly to determine whether they continue to be eligible for credit or qualify for special offers.
[See: 8 Ways to Maximize Your Credit Card Rewards.]
Landlords, utilities and employers are also interested in your credit history. Lenders aren’t the only ones who may be interested in a person’s creditworthiness. Landlords, utilities and even employers may want to take a look at how well an individual manages his or her money. “In private housing, there is no requirement that [a landlord] rent to someone without knowing they can pay,” says Ken Perry, partner in the New York City law firm Perry and Aronin. The same can be said for utilities, which may opt to deny service or require a deposit from those with a tarnished payment history, depending on what is allowed by state law.
Of all the ways in which a person’s credit may be used, employment decisions may be the most controversial. There are 11 states that have limited the ability of employers to check credit during the hiring process. In other states, credit history may be used as a way to gauge a person’s character or determine whether he or she has any conflicts of interest that could interfere with job responsibilities. Rather than a credit score, some employers are reviewing credit reports instead. “I’ve been in the industry for 10 years and never heard of [a score] being pulled for employment,” Richardson says.
[See: 10 Easy Ways to Pay Off Debt.]
Federal law offers protection. With so many people making decisions based on credit scores and reports, the federal government passed the Fair Credit Reporting Act to provide some consumer protections. Among other things, the act requires companies to have a permissible purpose and obtain your authorization before pulling a credit score or report. If they decide to deny an application based on this information, you must be informed of the reason for the decision and given the opportunity to review your credit report. “You have rights,” Perry says, noting that creditors trying to collect payments sometimes employ exaggerated threats about how they will ruin your credit score. “Don’t be buffaloed into doing things against your interest just because someone threatens you.”
The law requires information on credit reports to be accurate, complete and verifiable. Incorrect or inaccurate information must be removed or corrected within 30 days. What’s more, credit scores take into account a variety of factors, meaning no single negative report generally carries enough weight to ruin a person’s score.
While maintaining good credit is important, consumers shouldn’t despair if their number dips slightly. “Credit scores are a starting point for financial institutions, but not a stopping point,” Flemish says. An existing relationship with a firm, a positive payment history and a steady job may outweigh the impact of a lower score.
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How Important is Your Credit Score? originally appeared on usnews.com
