How Are Credit Scores Used?

Many organizations view a person's credit as an important indicator of that person's character, and believe that how a person manages his finances speaks for how he manages other areas of his life. Increasingly, insurance companies and employers are turning to the credit score to help profile their applicants and get to know more about them. Although this practice is at times controversial, it is likely to continue into the future.

Lending

Banks and credit card companies are the most obvious users of credit scores; they have done this for years. The higher the credit score, the less likely a borrower is to default on a loan. Measuring the possibility of default allows banks to offer the best interest rates to customers posing the least risk to them, and allows credit card companies to offer higher credit limits to deserving customers. While some are concerned about classifying individual people just by a number, many defend the use of credit scoring, saying that it allows a lender to make fair credit decisions quickly and conveniently.

Insurance Underwriting

Your auto or home insurance company probably uses credit scoring to determine whether they will give you a policy, and at what rate. According to the Insurance Information Institute, drivers with poor credit have up to 40 percent more auto insurance claims than drivers with good credit scores. In response to insurers' desire to reduce their risks and claim payments, the credit industry has responded with insurance scores. The factors making up an insurance score are different than a score used for lending, placing a higher priority on how long a person has been managing credit as a factor in her stability and lower risk.

Cellular Phones and Utilities

Before you open a new cell phone account, the carrier will probably check your credit to obtain a credit score. Increasingly, utility companies will also do this. They use the score as an indicator of how likely you are to pay your monthly bills. A cellular phone company may require you to pay a deposit or agree to have your service terminated if your bill exceeds a certain amount when your score is not up to their standards. Utility companies may also require a deposit, or someone to guarantee your bill will be paid on time. Both may turn you down for services based on your score.

Employment

Employers sometimes look at credit scores as another way that they can pick the most qualified applicants. This is more common if a company is hiring an upper level manager, or a financial officer. Companies may also check the credit score on a person who will handle cash as part of his job. Many companies will look at your overall report, rather than just the score, to get a better picture of the applicant. Past due payments or financial problems in the past may be a sign that the person has moved on from his problems. Current credit problems may indicate a person is a higher risk for theft.