Credit scores: Are they fair?

We often hear the saying “there is no such thing as a free lunch”, in other words, there is a cost to everything in life, one way or the other. Evaluating if a credit score is fair depends on which side of the fence you are standing on, borrower or lender and how this affects you.

Two ways of looking at credit score fairness include:

  • How credit scores are calculated and impact a person’s financial status.
  • How creditors or lenders choose to use an individual’s credit score.

How credit scores are calculated and impact a person’s financial status

An individual’s credit history information, derived from their credit report, is used in calculating a three-digit score ranging from 300 to 850, low to high, as an indicator of poor or good credit history over the past year. Different weights are given to certain parts of credit history, such as whether or not there are previous payment defaults, late payments and bankruptcies.

The FIKO credit score brand is mostly used by lenders, rather than the FAKO version, which is used for educational purposes, but is similarly calculated. When banks or creditors consider an individual’s application for lending, whether for long or short-term loans, the credit score is used as a predictor of the person’s ability to meet future repayments.

The lender or creditor uses the credit score in making a decision about the loan application, to either approve or decline credit. By viewing a personal credit report provided by a credit referencing agency or bureau, you can gain insight into your credit worthiness and the parts of your credit history contributing to your credit score.

How creditors or lenders choose to use an individual’s credit score

The credit score indicates an individual’s financial status, including account types, outstanding debts, debt payments and credit history length over the period of a year. Credit reports may contain errors; therefore it is the individual’s responsibility to annually check their credit reports, notifying the relevant credit bureau to ensure the information provided accurately reflects their credit score.

Credit scores are designed to be an objective calculation for creditors to use in deciding on approving a loan and what interest rates to apply. A person with a high credit score may be approved for a short-term loan with a lower interest rate and lower monthly payments than someone applying for the same loan, but who has a lower credit score. The reason is because the individual with the lower credit score shows a weaker credit history, potentially posing higher risk of default on future repayments.

Those whose financing needs are met by lenders or creditors without many issues arising around their credit score may say that use of credit scores is fair. Conversely, anyone who is adversely affected by lending decisions, such as for short-term lending and interest rates, may disagree. Financial status and individual responsibility in maintaining a credible financial history play a role in how credit score fairness is viewed.