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Our society values hard work. At least, that’s often what we’re led to believe: From a young age, we’re told to study hard so we can get good grades, get a decent education and reap the benefits it comes with. We’re motivated by the belief that we’ll be rewarded for our efforts.

Credit is the same way: Pay your bills on time, minimize your debt, and you’ll earn access to the best interest rates and credit products.

In contrast, does that mean a poor credit score is a byproduct of laziness? No. At least not always. Sometimes credit suffers because of a seemingly arbitrary credit rule, an honest mistake or even a stroke of bad luck. But credit scores and the complex mathematical formulas that power them don’t account for bad luck. Your credit score doesn’t care if you lost your job or are simply irresponsible. If you miss a payment, your score will take a hit.

You may be wondering, “Is this fair?” Lenders, on the other hand, will tell you that fairness doesn’t enter into it. To them credit scores are just math, and math is neither fair nor unfair. Another way to phrase the question is, do credit scores accurately access risk? Since risk is subjective, we’ll never have a straight yes or no answer to that. There are gray areas to be sure, but we do know that credit-scoring models are changing as lenders are beginning to avail themselves of new, potentially more predictive data.

Cold, Hard Numbers

Credit scores are essentially the results of very complicated math problems. Companies like FICO and VantageScore Solutions spend years developing these algorithms in order to best predict whether or not you’ll pay back a loan on time, based on specific actions you’ve taken in the past. And those past behaviors are turned into numbers and plugged into the scoring formulas without the details of your life as context.

There are five main factors in credit scores: payment history, how much you use of your available credit (credit utilization), average age of accounts, account mix and how often you apply for credit (inquiries). These are all important things, but not weighed equally, and the hundreds of credit scoring models out there weigh your credit history differently.

Not everything in your financial life counts toward credit. If you pay your rent and utility bills on time for decades, you could still have no credit history, because those things often aren’t reported to credit bureaus. This can be particularly difficult for young people or immigrants just starting out — how do you get access to the financial tools you want when the credit industry says you have no way of showing you deserve it?

“The score is a very objective tool,” said Sarah Davies, senior vice president of product management at VantageScore. “It’s going to look at that information, and it’s not going to bring in additional lenses: A missed payment is a missed payment. From the lender’s perspective, that’s potentially the same exposure.”

Davies brings up an important facet of credit scoring consumers often overlook: A lender’s point of view. It doesn’t matter if you have 10 people willing to stand up and say what a reliable person you are, despite that collection account you have. A credit score doesn’t incorporate personal references or any subjective evaluations of your character. Potential lenders look at a credit score because, from their perspective, it’s very risky to give money to someone with a history of loan repayment trouble, and they are looking for a simple way to quantify that risk.

“Try to think like a lender for a minute,” said Steve Ely, CEO of eCredable, an alternative credit bureau geared toward helping people with no credit history establish one. “If a stranger came up and said, ‘Can I borrow $20,000 for a car?’ your first reaction would be, ‘Absolutely not.'”

Uncomfortable Predictability

Even the most ardent statistician will tell you statistical models like credit scores are rarely perfect. Many consumers have characterized credit scores as particularly unfair.

“We are FORCED to use credit, even if we neither need to nor want to. If we do not use credit, we will have no credit score and be forced to pay too much for home and car insurance,” a Credit.com reader commented last year.

He makes a good point: In a way, credit is a game you have to play. Whether or not you want to use credit, not using it can have a big impact on your life. One of our readers experienced this firsthand when he fell behind on his rent and credit card bills because he got sick. His credit score fell from 637 to 528.

“I can’t get an apartment again because landlords use the crediting system to determine whether they will rent to you or not,” he commented on a Credit.com post. “I am a second year grad student with a really good job. I don’t know what to do about these credit issues.”

When asked about the fairness of credit scores, several industry experts hesitated, and ultimately responded by essentially saying, “It’s not that simple.”

“I truly think that they are both fair and unfair, depending on what perspective you’re looking at and how deep you want to go into that question,” said Barry Paperno, a retired credit professional who has worked at FICO, Experian, Bank of America and Credit.com, where he was a writer and credit expert.

The exclusion of context is the main factor that levels the playing field of credit scores. Your name, age, race, marital status, income, education — none of that goes into the score. Without all that, you’re left with nothing but a log of how you’ve used credit in the past. This lack of history or context indeed does seem unfair to many. However, credit experts will likely argue that objectivity is a crucial element of the model.

“The reality is that credit scores are based on studying millions of credit reports,” said Rod Griffin, director of public education for Experian. “The credit behavior that indicates risk is what I think people don’t like and what makes us uncomfortable — our behaviors are very predictable.”

Plain and simple: People who have defaulted on loans are more likely to default in the future than someone who has never missed a payment. For those who don’t think behavior tells the whole story, consider this: Before credit scores, lending decisions were very subjective, meaning your personal relationship to a lender — or even your race or religion — could be the difference between approval and denial.

“On the fairness side you can look at the historical perspective,” Paperno said. “Compared to the old days, things are a lot better.”

Better, Perhaps, but Not Perfect

Since your credit scores are based on your credit reports, the accuracy of those reports is crucial to your access to credit. That’s why reviewing your reports and scores regularly is so important, and if you find errors, you need to address them right away. Of course, that can be a tricky process, which the Consumer Financial Protection Bureau has already started investigating.

“When you can send someone to the moon faster than you can get the credit report fixed, there’s something wrong,” Paperno said.

Beyond improving credit reporting, scoring companies need to constantly evaluate their algorithms.

“It is important to acknowledge that the marketplace has changed,” said Anthony Sprauve, senior consumer credit specialist at FICO. Sprauve said the company is working to find ways to evaluate people who haven’t traditionally been on the radar of credit bureaus and scoring companies.

VantageScore 3.0 (which is available for free through Credit.com) was released in 2013 and scores 30 million to 35 million more consumers than previous models, because it scores people who infrequently use credit, have just started using credit or have no open trade lines. FICO, for example, scores only consumers with at least one trade line on their credit reports that is at least six months old, and they must have at least one trade line that has been updated within the last six months. FICO recently announced the upcoming release of its newest model, FICO Score 9, which Sprauve has said will be more predictive but sticks to the aforementioned scoring requirements.

Yet there’s a struggle between trying to score more people and trying to score them properly — there’s more consumer data available than ever before, but making sure it’s accurate and using it effectively is a huge challenge. That’s why scoring models take years to develop.

“Credit scoring modelers are continuously reviewing the predictiveness of their credit scoring models and revising them and updating them based on the marketplace,” Griffin said. “The bottom line is lenders want to make loans — it’s how they make money. Scoring systems and credit reporting help them do that while managing the risk of doing so.”

It’s Not All Black and White

Despite the inflexibility of the model, credit scores can also be forgiving. Negative information loses its clout as time goes on, allowing people to move past moments of financial crisis and fleeting mistakes. Even the worst things in your past eventually age off your credit reports, diminishing in importance as they do, meaning you’re not totally out of commission for the whole seven years after you find yourself with a collections account before it drops off of your reports entirely.

Most people have to work hard to get what they want out of the credit system. Others enter the system with a head start.

For example: Paperno made his daughter an authorized user on his credit card when she was younger. Through no action of her own, she has a good credit history attached to her name. With no job and no direct account responsibility of her own, this 18-year-old started getting credit card offers in the mail that were better than the ones her father — the one doing all the credit work — would get.

“I know very well why authorized users are included, and I believe they should,” Paperno said, “but one of the unintended consequences is someone with absolutely no credit experience can have a score well into the 700s, while somebody who works for a living, pays their own rent every month, pays their utilities, uses cash and doesn’t owe anyone a dime doesn’t have a score.”

That can certainly seem unfair, but keep in mind that being an authorized user isn’t a fast track to amazing credit, either. We all start with nothing and have to find a way in.

“If you’ve never had a loan, [lenders] don’t know how you are at managing a loan,” said Nessa Feddis, senior vice president at the American Bankers Association. “What a credit score reflects is how a person has managed credit in the past and how they’re likely to manage it in the future.”

Think of it this way: Being an authorized user can be a bit like having your learner’s permit. It takes a lot of time to get to the point where you’re allowed to drive on your own, and even then you’ll have some restrictions. Similarly, you can’t expect to get credit if you haven’t met the minimum requirements set by the industry.

“How do you give somebody a license if they haven’t passed the test?” Feddis said. “You’re not going to give somebody a car who’s never driven a car.”

Carrying the Weight of Bad Credit

It’s understandable that people with credit histories dotted with risky behavior are going to have low credit scores, because decades of data says those people are more likely to miss payments than those with pristine credit reports. Presumably, good behavior will allow you to move away from past mistakes and improve your credit score over time.

But is it really that easy? A report from the National Consumer Law Center indicates that people with credit problems may be at a competitive disadvantage when it comes to building their credit.

Consider this analogy: You’ve been instructed to run a mile in less than eight minutes. You fail, and now you have to run it again, until you reach your goal. It was hard the first time, but now you’re tired, making it that much harder. Essentially, your failure perpetuates itself, and while success is not impossible, it’s becoming increasingly difficult to achieve, because you’re struggling to shake the fatigue that came from past failures.

To put this in credit terms, imagine that you lose your job and can’t pay your mortgage; your credit will tank. Consequently, you may have trouble qualifying for loans or credit cards, and if you do qualify, you’re going to pay a lot more in interest than someone with good credit. That burden of high-cost loans could make it difficult to pay your bills, which may then be sent to collections. A collections account adds another hit to your credit score, so you continue to grapple with diminished access to credit and high interest rates.

“That’s when we get to the issue of if there’s a vicious cycle effect,” said Chi Chi Wu, an attorney at the National Consumer Law Center. She used the example of people who lose their jobs due to economic decline and end up in foreclosure on their homes. “They might be required to pay more for insurance, they might be denied rental housing or even employment based on negative information on their credit reports.”

Wu acknowledges it’s an imperfect system, but it used to be worse for consumers before lenders used credit scores.

She continued: “On the one hand, scores are more objective than the prior system where everything was judgmental, but the other hand, they’re sort of a blunt approach.”

A Quest for Something Better

Getting back to the original question: Are credit scores fair? Some credit experts suggest it’s more important to analyze whether or not scores are doing what they’re supposed to do as best they can.

“I think the word fairness sort of startles me,” Feddis said. “Why is it not fair to use somebody’s past history? … It may be unfortunate sometimes, but to say it’s unfair is a real stretch.”

As far as addressing those unfortunate situations, there are a lot of parties interested in making the system better. There’s competition between scoring companies like FICO and VantageScore, which means that both companies are incentivized to create scores that calculate risk better. They both want to be known as the most predictive scores, which is why they either have updated their scoring models, or plan to. It’s also why there are so many new credit-reporting companies, like eCredable, who are fighting to get their data incorporated into credit scores. In addition, the Consumer Financial Protection Bureau is dedicated to making sure credit reports accurately reflect the consumer’s history and, as a result, contribute to accurate credit scoring.

Ed Mierzwinski, federal consumer program director and senior fellow for U.S. PIRG, hopes the CFPB spends a lot of time looking into credit bureaus and credit scoring, since the CFPB has the ability to look deeper into these industries than any federal agency before it.

“If they are using procedures that limit the opportunities for some kind of consumers, they should be held accountable for that,” Mierzwinski said. “You can choose your bank or credit union, you can choose your card company, but you cannot choose your credit bureau, which is even more reason they need to be held accountable.”

More on Credit Reports and Credit Scores:

Image: Sean Wandzilak

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