If you have ever applied for credit, you will probably have come across several credit scores. There seems to be one for a mortgage, one for a bad credit car loan and another still for your credit card. So why so many?
The answer is actually deceptively simple, specialization. Just like Chrysler or Nissan sell several different models of vehicle for different people and different uses, credit companies compile different scores dependent on the use they will be put to.
For example, a credit card company will want an idea as to whether you will use the card responsibly and manage the repayments each month. A bad credit car loan specialist will want to know if you can afford the loan and whether youâ€™re a habitual defaulter or whether youâ€™re caught up with the millions of others in the economic crisis.
The same for a mortgage company, they will want to know if you can make the payments and if youâ€™re likely to keep them up for 25 â€“ 30 years. There is a credit score for almost every type of lending in the market.
Each credit score is compiled from the same data, but used for different reasons. Different elements from that data will be used to answer the questions a particular lender has, which are not the same.
There is also an element of competition too, which is good. Living in a free market economy, competition drives innovation, standards and value, all of which we could do with more of. Having different companies compiling credit scores ensures the standards are high and that they are increasingly accurate.
It does present problems to consumers, we appreciate that. If youâ€™re applying for a bad credit car loan, you need a different score than if you were thinking of re-mortgaging. That makes it a little more difficult to get the data you need.
However, it also works in your favor as, these more specialized credit scores paint a more detailed picture of your ability to borrow. The better the picture the lender sees, the more likely they are to provide the capital you need.