Americans who have applied for loans in the past understand the importance of a good credit score. Ideally, this is the number that represents a person’s credit history and signals to banks whether they are worthy of a loan.
The key word here is “ideally.” It is not always true that a person with a high credit score has a low risk of defaulting on a loan, and vice versa. When it comes to fully evaluating a person’s credit worthiness, that number isn’t everything.
Though we may understand credit scores in general terms, there are plenty of specific details about these numbers that many people do not grasp.
For example, a recent article on U.S. News and World Report notes that many people believe there is only one type of credit score. This is not true. Even lenders who use a FICO model may not be using the same one as a competing lender, resulting in different scores. For this reason, consumers should not rely on the number alone to determine whether they have good credit. Instead, they should focus on where their score falls in the lender’s risk model.
It is important to remember that there are limits to credit scores. As explained by a post on the blog “A Whole Lotta Nothing,” it is certainly possible for a person to pay down large amounts of debt and end up lowering their credit score — even if this puts them in a better financial position. Lenders need to take many more factors into account by using risk assessment tools to determine who is really at risk for default.