Your credit score matters for lots of different reasons. Find out here why you need to care about this important number.Image source: Getty Images.
Your credit score is a score assigned by different lenders or credit scoring agencies. While you actually have lots of different credit scores, the two most widely used scores are your FICO® Score and your VantageScore. Both are on a scale of 300 to 850, and higher scores are better.
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You need to work hard to earn a good credit score, and make sure that you’re paying bills on time and borrowing some money, but not too much. It can sometimes seem like a lot of effort to borrow responsibly to build your score -- but it’s worth doing because your score can impact so much of your life.
Not convinced your score matters? Read on to find out three key reasons you definitely need to care about your credit score.
1. Your credit score determines if you’ll be approved for a loan
Chances are good you’ll need to borrow money at some point. You may need a mortgage to purchase a home or a student loan so you or your children can afford college. You may also decide you want a credit card because you can charge everyday purchases on your card and earn rewards for spending.
If you hope to get approved for a credit card or any kind of loan, you’ll need to have a good credit score. In fact, with a credit score below 580, it would likely be impossible for you to qualify for a mortgage. With a score between about 580 and 670, your options for mortgages would likely be limited to FHA loans or subprime loans. A low score could also mean you can’t get a personal loan, aren’t eligible for private student loans, and are limited only to getting a secured credit card with assets serving as collateral.
You don’t want to find yourself unable to get the financing you need to fulfill big goals, including buying a house or car. You also don’t want to be stuck in a situation where you can’t access a credit card if you need one. You need to build your credit score so when you apply for financing, you have your pick of different lenders offering affordable loans with good terms.
2. A higher credit score can lead to a lower interest rate
Your credit score not only determines if you’re allowed to borrow, but also how much interest you’ll pay for the privilege. The difference in interest rates can be substantial if you have an excellent credit score versus a poor one.
If you have a FICO® Score above 760 and you want to borrow $300,000 to buy a home, you could expect to pay around a 4.172% interest rate as of January 2019, according to myFico. With this loan, your monthly payment would be around $1,462 and your total interest costs on your loan would be around $226,375. If you had a score of 670, your interest rate would likely be around 4.785%, leaving you with a monthly payment of $1,571 and a total interest cost of $265,660.
Unless you can afford to waste almost $40,000 on extra interest and you don’t mind paying $109 extra per month for the same house, it’s easy to see why you need to care about your credit score.
It’s not just a mortgage you’d pay more for. Car loans, private student loans, personal loans, and even credit cards could all carry a higher rate if your score is lower.
3. Companies you do business with check your credit
If you don’t plan to borrow money, you may think your credit score doesn’t matter much. Sadly, this isn’t true. Lenders and credit card companies aren’t the only ones that check your credit -- many companies you do business with will use your credit score and credit report to determine how responsible you are.
Landlords typically pull your credit before deciding to rent to you, for example, and you may be denied an apartment or required to make a larger security deposit if your score isn’t good. Your auto insurance rates could be higher if you have a low credit score too, and you may not be able to get a cell phone contract. Utility companies may be worried you won’t pay and require a larger deposit when you get hooked up to electric and sewer or cable TV service.
As if all this wasn’t bad enough, many employers also perform credit checks as part of a pre-employment background check. This means your employment opportunities could actually be curtailed if your credit isn’t good.
Your credit score clearly matters
Since your credit score can affect your job opportunities, living situation, and costs associated with many financial transactions, it’s clearly important to try to earn a good credit score. The good news is, if you borrow responsibly and pay your bills on time, earning a good score doesn’t have to be hard. It’s definitely worth doing, because your credit score matters.