Why Credit Scores Are So Important

As indicated above, credit scores fall with a certain range of values. These values indicate how effectively a consumer manages their financial obligations based primarily on their willingness to pay. If accounts are continually being paid late or not paid at all then that consumer will have a lower score than someone who continually pays their bills on time.

The scoring system has become extremely important over the past few years as the credit score has been proven to be a successful indicator of who will pay their bills/debts on time. When deciding if someone should be lent money, a lender is going to look more favorably to a higher score consumer as they have a proven track record of being willing to pay their debts on time.

It is the use of this scoring system that has led to risk based pricing. Someone who has a proven track record of repaying their debts on time will usually be given a lower rate of interest compared to someone who has proven that they will pay their payments late if at all. The higher interest rate compensates the lender for the added costs of trying to collect on the debt as the consumer with the lower score has already proven that they are not willing to pay their debts on time.

With the credit score being a mathematical calculation of financial behavior, other industries have performed various mathematical analyses of credit score to see if there is a relationship between a consumer's credit score and other types of behavior. For instance, the insurance industry has determined that drivers with good driving records tend to have better credit scores that drivers with numerous tickets and accidents thus they set insurance rates based on credit score.

Since we live in an age of information being more readily available than in the past, there will continue to be attempts to link behavioral traits among different types of industries. It appears that the common denominator being used in theses analyses is the consumer credit score. That being the case, it is even more important to keep your credit score in what is considered to be an acceptable range. As more data becomes available, what is considered an acceptable score has also changed. It used to be that a score of 620 was considered to be an excellent borrower, now that score has moved to 680 and in some cases 720.