While doing some keyword research I came across a question posted by someone asking 'why must we have credit scores to determine trustworthiness'.
This person stated that they were in there late 20's and had made it all the way up and through grad school without taking any loans. Further stated was that they had worked their tail end off while attending school in order not to owe anyone money so they could graduate free and clear. As a result they did not have a credit history. They did not have a credit card, had saved up for all of their purchases and had worked hard to stay out of debt.
First let me give this person a standing ovation. This person will probably join the ranks of the wealthy before too long. Few people today approach their financial health in this manner. As a mortgage loan officer, I have seen so many people whose credit scores are low because they were unable to repay their student loans in a timely manner after graduation.
To answer this question we have to consider that few people are able to save up to make a large purchase like a home and therefore a need for a credit rating system.
Years and years ago if someone wanted to borrow money they would go to the local bank to get a loan. The banker was a part of the same community and would make loans based on knowing the person or their father or grandfather. The banker would know the background and character of the family. There was no need for a way to rate someone's credit worthiness because they knew the person and their ancestry.
As we have evolved into a more global world we deal with people everyday that we don't know and have never even met before. And in the case of getting a mortgage, the underwriter who makes the final decision about the loan will probably never meet, or even speak with, the borrower during the whole loan process.
With this global growth it became necessary for financial institutions to come up with a way to judge if a person was worthy. Out of this need came the score. The credit score is used almost exclusively today by credit card companies, home mortgage companies, auto loan dealers and finance companies when you apply for a loan.
With credit scores lenders can make loans without personally knowing the person or some family member. This opens up a whole new world to the borrower for a source of loans.
The advantage is that the borrower can shop for better rates and get larger loan amounts and usually get their loan faster. The disadvantage is that the scoring models are proprietary and therefore you don't really know how your score is calculated. And if you happen to be one of those people who has had something happen financially in your past that brought down your scores, the bureaus won't offer a lot to help you get them back in good standing. In addition, there are a large percentage of errors in people reports and the credit bureaus take no responsibility for making your life miserable as a result of errors caused by them or by your creditors.