Why Your Credit Score is So Important

What is a Credit Score?

Your credit score is one of the most confusing things about the credit game, and yet it affects a great deal of your financial life. Basically, your credit score is just a number used to help banks, lenders and other financial institutions determine the likelihood that you’ll pay back a loan. The particular loan can be for a house, car, or even just a credit card.

Why Your Score So Important

Since a poor credit score indicates that you may be a higher risk of paying late or not at all, lenders will either deny the loan or charge you a higher rate to cover their risk. Sometimes that rate can be a LOT higher. Or, they flat out deny the loan all together.

Unfortunately, your credit score actually affects more than just loan applications. Insurance companies believe that people with lower credit scores are more likely to make insurance claims, so you will likely pay more for house insurance and auto insurance if you have a bad score.

Landlords often run a credit check before offering you a lease. If your credit is poor, you may be denied the opportunity to rent the place you want. Employers may even pass you over because bad credit can be a sign of irresponsible behavior.

As you can see, having a low credit score can cost you a lot of money, while having an excellent score will save you money, and more. Let’s take a concrete example of just how much this can affect you:

If you have bad credit and take a car loan for $15,000 at 12% over 5 years, your total payments = $20,020. On the other hand, with good credit, the same loan amount at 4% will cost a total = $16,575. That’s a pretty big difference.

Now that you know how important your credit score is, let’s look closer at the details. First, a word about credit agencies.