If I have a lot of money in the bank then does credit score even matter? Generally confused as now I feel it’s getting crazy some of the prerequisites required to rent or finance or put money down.
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It’s an easy and quick way for creditors (credit card companies, banks, loan agencies, etc.) to assess how big of a risk it would to offer you credit.
If you have a history of living within your means and paying off your debts, then you’re a good customer for a company to give credit too because they have every reason to believe that you’ll pay it back.
But if you have a history of maxing out credit cards and not makin car payments, then you are huge risk that could cost the creditor even more money than the value of the loan offered.
Credit scores came about to have a pretty universal way to determine credit-worthiness fast and efficiently as more people needed credit and banks stopped being neighborhood institutions that knew everyone’s personal story.
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Your credit score is a way to quickly assess how you handle credit, and it is only one factor that a lender will consider when you apply for credit. It takes into account your on time payment history, credit card utilization rate, overall length of your credit history, mix of accounts and any derogatory information.
However, lenders will also take into account your income and how that will affect your ability to pay (you’re not getting a new Porsche on $30k a year, despite your 800 credit score).
If you have enough money to cash everything like a car and your house then a credit score doesnt really matter. Do you have that much money? But even if you a lot of money in your bank, but arent cashing it then it does matter.
It’s a score telling lenders whether you are low risk or high risk if they were to loan you money, eg. are likely to make your payments regularly and on time.
It’s calculated by looking at credit report data like how many account you have, age of accounts, variety of accounts (credit card, car loans, mortgages, etc), your balance relative to credit limit on credit cards, history of on time payments, any negative marks (account written off as bad debt, bankruptcies), any recent credit applications (hard pulls). All that info gets parsed into a number that in many cases can provide instant/quick approvals on loans.
Let’s say you wanted to loan out money to 1 million people this year. And you had seconds to decide who to loan to and how much to charge to cover the risk that some people won’t pay. A very useful product for you would be the previous payment history and other current debts of those 1 million people.
The credit agencies collect that payment history and debt information and charge companies who want to use it. The companies can then use that data to make their decisions.
Or the companies can pay the agencies to estimate the risk for them. One product that does this is the FICO score. It’s a single number that is a generally useful gauge of risk of repayment.
Our financial institution does both. We pay for FICO scores but we also have our own credit models and internal credit score because the FICO score may or may not be the best indicator for our specific customers.
Credit is also a highly regulated industry. There are many factors that banks and credit agencies *could* use to make their risk models more accurate but can’t, like race or ethnicity for example (I don’t know if those would actually enhance a model, but they are prohibited). They also can’t use “analogues” for race, like your neighborhood + census demographic data to predict your race and then use that for or against you.
If you don’t need to borrow money your credit score won’t come up often. But some jobs will pull your credit because being deep in debt and behind on payments could be a powerful motivator to steal or embezzle money, or sell nuclear secrets to an enemy country. And while credit scores aren’t calculated *specifically* around paying your rent they can be a good estimator of the risk of renting an apartment to you (which is essentially a “loan” to use property that you are paying monthly for).
Let’s say Alex wants to borrow some money from Bobbie. How does Bobbie know that Alex will pay them back? Well they can’t know for certain, but they can ask around people who’ve loaned money to Alex before, to see if he usually pays them back on time. Bobbie also wants to know what other loans Alex currently has; if they have too many loans, it’s more risky to lend to them.
Rather than ask around, Bobbie can go to one of the three credit score companies (TransUnion, Equifax, and Experian), who have been keeping track of this stuff, and combine it into a number called a “credit score”; The higher the score, the more likely the company thinks Alex.will repay the loan in time.
You might ask, “If to borrow money I need a credit score, and to have a credit score, I need borrow money, how do I even get started?” Good question! Often, a first time lender has a “guarantor”, who promises to pay the debt if the original lendee can’t (or won’t) pay.
Now this system is definitely not perfect; Since you need credit to access credit, this means that poorer families, communities, and neighborhoods often have trouble borrowing money. Believe it or not, there were even MORE problems before credit scores, since lending decisions were made much more subjectively by a loan officer.
Money in the bank doesn’t affect credit score, but it is another factor that banks look at to determine whether to lend to you; A bank feels better knowing that the person they are lending to has enough money to cover the debt, so it might help. (not financial advice)
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