When talking to people about the need for a good credit score when applying for a loan I often compare it to that “permanent record” we were threatened with in our school days – you remember, “and if you do this [fill in misbehavior here] it will go on your permanent record!” As it turns out there is a “permanent record” but it’s not related to school, it is related to your credit. Your history of taking on debt and how you manage it creates a credit history and a credit score. Potential lenders, landlords, maybe even potential employers will use that score to decide if they want to do business with you.
How are the scores derived? How much will they go up or down if you undertake a certain activity? It’s hard to say. There are some general guidelines: pay your debts on time; do not use more than about 30% of your available credit; credit from some sources is worth more than credit from others and so on. But the exact algorithm is a carefully guarded secret – like the formula for Coca Cola.
Now a new barrier is rearing its ugly head in the field of credit scoring. A recent article in Shelterforce, “Unfriend Your Neighbor to Get a Loan?”, comments on Facebook’s application for a patent on technology that would let lenders know the credit scores of your friend network as well as your own, as they weigh whether or not to extend credit. It’s redlining for the information age. To learn more about this alarming trend, read the whole article at Shelterforce.