Panel of interviewers meeting a job applicant

Why your credit score matters

It's tempting to dismiss your credit score as nothing more than a flawed, unilluminating measurement. Just as singular sports statistics rarely manage to encapsulate the full range of an athlete's performance, how on earth could a credit score manage to accurately convey the complexities of a person's financial profile?

While that is undoubtedly a tall order for a three-digit number to fill, credit scores actually hold up pretty nicely. More importantly though—for the purposes of this article, at least—they are held in high regard around the financial community and by those who sell products that require buyers to be in good financial standing.

That could refer—but isn't limited—to:

  • Landlords
  • Auto dealers
  • Potential employers
  • Insurers
  • High-end retailers
  • Bankers
  • Cell phone providers
  • Alternative lenders
  • Utility companies
  • Government agencies

Why do these parties take credit scores so seriously? Because there's no other signalling method that conveys as much information with that level of efficiently.

Think back to the sports analogy. Sure, it would be great if the opinions of fans and analysts could always be backed up by extensive film review and statistics were always complemented by the eye test, but that's not always feasible. Even full-time sports pundits don't have enough time or brain capacity to sift through every single minute of game action in the leagues they cover.

It's more or less the same thing with the 10 types of people and organizations listed above. They are tasked with making important evaluations about individuals' habits and abilities, but need to do so in an efficient manner so that resources don't get drained too badly from other facets of their operations.

By using credit scores to make those determinations, companies may sacrifice a little bit of nuance. However, most of the time, that three-digit number—and perhaps the accompanying statistics of a credit report—will be able to paint a pretty accurate picture of what a consumer is all about.

Credit scores encompass all the critical elements that would signal whether someone is trustworthy enough to receive a loan, job, contract, etc. The scoring algorithm is based on payment history, amounts owed, length of credit history, types of credit used, and pursuits of new credit. Though it won't be able to tip off viewers that your one late payment only arose as a result of having to bail out your irresponsible brother, it offers enough lee-way that people who slightly slip up once or twice won't be too compromised.

So there you have it. Your credit score matters because the people who most greatly affect your financial livelihood want it too. Regardless of how much you are on board with its merits, others will be taking it very seriously. That's why it's always recommended to be on top of what lowers credit scores and what can be done to improve them.