The Key to Understanding Credit Scores and Credit Reports

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The most important thing to understand about credit scores and credit reports is that they were not created for your benefit. They were created by the banking industry for the banking industry. They do not tell the bank whether you are honest or an all round good person. It is a tool that they use to estimate how much money they can make from you. If you learn nothing else from this, please understand this one point.

The bank is not your friend. It's great that you might have friendly interactions with their employees but ultimately they are at best a business partner. When they give you a bank account, loan, credit card or mortgage, they are not doing this as a favour. This is business. Their objective is to make money. Your debt is their bread and butter. As long as you are indebted to the bank, they are making money from the relationship and they like it that way. This isn't necessarily a bad thing but it's important that you understand the relationship. Personally I would rather have no debt. On the other hand the bank would be happy if I was in debt to them for the entirety of my life. As long as we can pay, that's financial stability for them.

This has everything to do with credit scores. If you rarely use credit and when you do, you pay it off within a very short time, your credit score won't be very good. Sure you're honest, hardworking and responsible. That doesn't matter to the bank. You haven't demonstrated to the bank that you need them and that they have hope of making good money from you in the future. You can't get a great credit score without using credit.

A person who is piled up in debt even if they make the occasional late payment, will have a better credit rating than someone who has paid things cash all their life and owes nobody a cent. That may seem counter intuitive to the average person, but when you understand that credit ratings tell the bank whether they can expect to make money from a person, it should all start to make sense.

Banks are not really your enemy either. If you understand credit at the basic level I've given you here, you can start making these banking tools work for you instead of against you.