As credit reports and credit scores become more embedded in the social consciousness of consumers, the personal credit rating system is more important than ever. We've never known more about the formulas that determine whether we'll get approved for credit and what kind of rates we'll get, which is both a blessing and a curse. While we can now build our credit around the metrics used by the banks, we can also see the flaws inherent in the system.
Credit Rating System
Today's most prominent personal credit rating system, the FICO score, takes into account five major factors from our credit reports. Of the five, the most important is your history of paying on time, which counts for more than a third of your score. Your level of debt in relation to your credit limits comprises 30 percent of your score, the age of your accounts is another 15 percent, and your mix of credit types and the number of inquiries on your credit report each count for 10 percent. The end product is a number that gauges the level of risk that you'll faithfully repay your debts to your creditors in a timely manner.
Predatory Credit Score Merchants
One huge problem in today's credit world is that, while you can get your credit report for free, you have to pay for a credit score that tells you how your credit really stacks up. This becomes problematic when you consider the many companies that try to hook you in with a "free" credit score, only to charge you for a monthly credit monitoring service you don't want. Worse, these companies don't sell FICO scores; instead, they sell their own scores using their own metrics, which may or may not line up well with your FICO score. As a result, you could end up getting charged upwards of $15 a month for a score that isn't even accurate.
Credit Score Composition
Another drawback of the personal credit rating system is the priority it places on your mix of credit-based accounts. In essence, the credit system rewards you for having huge debts like mortgages, auto loans and student loans. One could argue that this is in the best interest of the banks, as it allows them to collect huge amounts of interest while simultaneously patting the backs of their customers. The idea behind the credit mix is that banks want to see how you can handle a big monthly payment; however, some consumers are so obsessed with their credit scores that they carry balances on their cards just so they can have a better credit mix.
Credit Repair
With credit being such a huge issue in today's world, it's no wonder there are so many companies focused solely on helping people repair their credit ratings. However, what should be a benevolent industry is instead quite shady. Credit repair companies and debt settlement companies have come under fire from the Federal Trade Commission for taking the money of customers and providing nothing in return. Meanwhile, credit counseling agencies, which are seen as more legitimate, are largely owned by the credit card companies. It can be hard for customers to tell if any of these groups have their best interests at heart, leading people to neglect the help they so desperately need to get their credit fixed.
