Why is Your Credit Score so Important?

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Lenders, insurers and sometimes even employers will look at this number, in addition to your overall credit report, to determine your risk as a borrower, a customer and an employee.

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Your credit score is only a part of your total financial picture, but it can have a huge effect on the rest of it. Lenders, insurers and sometimes even employers will look at this number, in addition to your overall credit report, to determine your risk as a borrower, a customer and an employee. 

What is a Credit Score?

There are three independent credit reporting agencies: Experian, TransUnion and Equifax, which use their own scoring models to give you a number between 300 and 850 that measures your creditworthiness.  They put your payment history, the number and age of the credit accounts you have open and other financial information into their model and out comes your credit score.

If you don’t know what your credit score is, you can request one free report a year from each of the agencies.

People with High Credit Scores pay Less to Borrow Money

Whether you want to buy a house, a car or go back to school with the help of student loans, the loan you get will depend largely on your credit score.  Since lenders view credit scores as an indication of risk, they offer borrowers with high scores lower interest rates, and borrowers with low scores higher interest rates. 

A higher interest rate could mean paying thousands of dollars more for your loan than you would otherwise have to.  For example, someone with a credit score of 760 or better, might get a $200,000 mortgage at a 4.29 percent interest rate.  Over the life of their mortgage, they would pay $155,884 in interest (that’s $155,884 in addition to the $200,000 principle they borrowed).  Alternatively, someone with a credit score of 620 might get the same $200,000 from the same lender at a 5.5 percent interest rate.  The person with the lower credit score will end up paying $208,808 in interest over the course of their loan—that’s a difference of $52,924.

If your credit score is too low, a lender might decline to offer you a loan altogether.

People with High Credit Scores Could pay Lower Insurance Premiums

Since insurance is regulated on a state level, different states have different laws about what insurers can and can’t use when determining the cost of your monthly premium.  Some states allow insurers to look at your credit score even though it might seem like it has nothing to do with your physical health.  These insurers typically charge people with low credit scores higher monthly premiums.

People with Low Credit Scores Might not get the Job

Some employers will check job applicants’ credit scores and reports before extending a job offer because they think they’re a good indication of how reliable a worker these applicants are likely to be.

People with High Credit Scores get Other Financial Benefits

When you have a high credit score, you might be offered reward credit cards at lower interest rates or with signing bonuses.  You could also receive offers for investment accounts that would otherwise not be available and better terms on your tv, internet and cell phone service.  If you have low credit, you might have to pay a deposit before a service provider will set you up with an account, and you could even have to prepay for part of your service.

The bottom line is, your credit score is only an indication of your overall financial picture, but a better score often leads to a better financial picture.  It can help you save money and better manage your resources so you can continue to make good financial decisions. 

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Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.