What Are the Benefits of Credit Scoring?

Nearly everyone who has ever taken out credit has been assigned a credit score -- a number representing an estimate of the probability an individual will pay back a loan. These credit scores are issued by credit bureaus, also called credit reporting agencies, which gather information about an individual's borrowing habits and use it to calculate his credit score. This practice of credit scoring has a number of advantages to both lenders and borrowers.

Availability

One of the main advantages of credit scores is that it makes a large amount of information about a person's lending habits available to borrowers. Prior to the formation of credit reports and credit scores, a lender could only gather a limited amount of information about prospective borrowers. Credit scores, based on credit reports, offer a succinct encapsulation of a borrower's creditworthiness that takes into account what is often dozens of pieces of information.

Transparent

With a credit score, both a borrower and a lender know what a credit reporting agency thinks of an individual. Before credit scores, a person would have a very limited idea of what kind of credit risk he represented and for what interest rates he might qualify. With credit scores, a person not only knows how lenders see him, but he has the potential to improve this score by taking out and paying back more loans.

Impartial

A credit reporting agency applies the formula used to determine an individual's credit score to each individual the same way, without exception. While the accuracy or fairness of these formulas may be up for debate, the formulas are applied equally and impartially. This means that a credit reporting agency cannot show partiality toward a particular individual for factors unrelated to his borrowing history. This prevents discrimination based on race, gender, religion, and other cultural and physiological factors.

Speed

By offering a summary of an individual's creditworthiness with a single number, credit reporting bureaus greatly increase the speed at which loans can be approved. Prior to credit scores, lenders often had to process a large amount of information in an attempt to determine the risk they would undertake in lending to the borrower. With credit scores, credit reporting agencies have already done this. Lenders will often set interest rates for borrowers instantly, depending entirely on their credit score.