by Amy Lillard
Credit and credit cards are an integral part of our economic system today. But there is a lot of misinformation and misunderstandings about credit. In this continuing series, we examine key concepts, tips and best practices when it comes to credit cards.
(10/17/2012) Credit scores are an increasingly important indicator of a person's financial capability . In the flurry of credit cards and bigger loans issued today, credit scores offer lenders a quick and fairly consistent assessment of a borrower's likelihood to pay the loan back regularly and on time. Before the simple three-digit number, lenders would physically examine applicants' credit reports to make a decision on extending credit. The process was time consuming, and the final decision was subjective, susceptible to mistakes and bias from human judgment. Credit scores are more fair and independent assessment for both lenders and borrowers.
Today, credit scores are used by the typical banks and lenders. But because credit scores are a simple and fair evaluation of individuals' financial profiles, more and more groups and companies have begun using credit scores for a wider range of assessments.
Credit scores are used by:
• Lenders. Whether you're applying for a mortgage, a credit card, business loan, car loan, or any number of other types of loans, the lending company will use your credit score to determine your viability as a candidate.
• Insurers. When applying for an insurance policy, the insurer may use your credit score as a means to determine ultimate premiums due each month. This is relatively common for homeowners insurance, and has been popping up with increasing frequency in other areas, like automobile insurance.
• Utility companies. Whether signing up for gas, electricity, or water, utility companies may use your credit score as a reason to require a deposit, and help determine the amount of that deposit.
• Cell phone companies. Credit scores can be the factor for cell phone companies to extend contracts.
• Landlords. When applying for a lease for an apartment or house, credit scores are a way for landlords to assess your qualification as a responsible tenant.
• Employers. More and more potential employers are using credit scores as a means to screen job applicants, and even examining their credit history. Often this analysis is used just to verify information on your application, but it is sometimes used to get a glimpse at how you handle your finances. Employers are required by the Fair Credit Reporting Act to get your permission before doing this, and to disclose if the contents of your report influenced their decision.
Since credit reports are used by an increasing number of entities, it's even more important to review your report regularly, and to engage in good credit behaviors.
For Additional Reading:Credit Scores: Which Ones do Lenders Use?
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