Our society values hard work. At least, that's often what we're led to believe: From a young age, we're told to study hard so we can get good grades, get a decent education and reap the benefits it comes with. We're motivated by the belief that we'll be rewarded for our efforts.
Credit is the same way: Pay your bills on time, minimize your debt, and you'll earn access to the best interest rates and credit products.
In contrast, does that mean a poor credit score is a byproduct of laziness? No. At least not always. Sometimes credit suffers because of a seemingly arbitrary credit rule, an honest mistake or even a stroke of bad luck. But credit scores and the complex mathematical formulas that power them don't account for bad luck. Your credit score doesn’t care if you lost your job or are simply irresponsible. If you miss a payment, your score will take a hit.
You may be wondering, "Is this fair?" Lenders, on the other hand, will tell you that fairness doesn’t enter into it. To them credit scores are just math, and math is neither fair nor unfair. Another way to phrase the question is, do credit scores accurately access risk? Since risk is subjective, we’ll never have a straight yes or no answer to that. There are gray areas to be sure, but we do know that credit-scoring models are changing as lenders are beginning to avail themselves of new, potentially more predictive data.
Cold, Hard Numbers
Credit scores are essentially the results of very complicated math problems. Companies like FICO and VantageScore Solutions spend years developing these algorithms in order to best predict whether or not you’ll pay back a loan on time, based on specific actions you’ve taken in the past. And those past behaviors are turned into numbers and plugged into the scoring formulas without the details of your life as context.
There are five main factors in credit scores: payment history, how much you use of your available credit (credit utilization), average age of accounts, account mix and how often you apply for credit (inquiries). These are all important things, but not weighed equally, and the hundreds of credit scoring models out there weigh your credit history differently.
Not everything in your financial life counts toward credit. If you pay your rent and utility bills on time for decades, you could still have no credit history, because those things often aren't reported to credit bureaus. This can be particularly difficult for young people or immigrants just starting out — how do you get access to the financial tools you want when the credit industry says you have no way of showing you deserve it?
"The score is a very objective tool," said Sarah Davies, senior vice president of product management at VantageScore. "It’s going to look at that information, and it’s not going to bring in additional lenses: A missed payment is a missed payment. From the lender’s perspective, that’s potentially the same exposure."