Every time you apply for a loan, sign up for a credit or store card or rent an apartment, the other party in the transaction will check your credit score. That said, it’s obvious why your credit score is important. The purpose of this score is to give companies a way to judge how well you can pay back their money. A high credit score means credit bureaus have determined you are not too deep in debt and/or you have a history of paying your bills on time. A low score usually means you’ve exceeded your limits or have had past trouble making payments.
Why Credit Score is Important?
When your credit score is important most is when you borrow money, either through a loan or a line of credit. Lenders use your credit score to determine how risky it is to loan you money and adjust your interest rate accordingly. With a high credit score, you’ll be approved for a bigger line of credit and a lower interest rate. A low credit score means you may be rejected—or be offered a very high rate of interest.
Any time you borrow money, you want the lowest interest rate possible! Having a high credit score is important in getting the best rates. Higher interest adds to your monthly payment and the overall amount you’ll pay back for a loan. The difference in interest rates for a home mortgage paid by someone with an average credit score and one with a high credit score could mean the average scorer pays hundreds of extra dollars each month. So save yourself money in the long run, and keep that credit score high! Even an average or fair credit score will cost you more because of the risk you pose to lenders.
Checking your Credit Score
Credit scores typically range between 300 and 850. There are three credit reporting bureaus (Equifax, Experian and Trans Union) that calculate your credit score based on information contained in your credit report. This information is gathered from credit card companies, banks, retailers, mortgage companies and other lenders that have granted you credit, as well as public record and information from collection agencies. Federal law requires that these companies give you one free credit report each year. Information on getting that report can be found here!
Negative actions such as late payments, judgments, tax liens and bankruptcies will lower your credit score. Most negative information will stay on your credit report for seven years, but bankruptcies can remain on your report for up to 10 years.
Even though your credit score is important, having a low score isn’t the end of the world. Every positive action you take financially—paying off loans and making monthly payments on time—will bring that score up and set you back on a path to a good financial future!