If you’re like most people, you won’t know your credit score until you suddenly realize it’s important. Normally, this happens when you apply for a mortgage or another large loan.
You see, you might be ignoring your credit score, but banks, businesses and other lenders aren’t. For these users, your credit score is a vital snapshot of your financial well-being and trustworthiness, and it enables them to manage their risk when lending to you, hiring you or selling you their services. It’s the culmination of every large financial decision you’ve ever made — and it can have a significant impact on your future decisions.
Let’s take a look at some of the significant ways in which your credit score impacts you.
1. The Interest Rate on Your Mortgage
Your mortgage is likely to be the biggest loan you take out in your life, and your credit score plays a significant role in determining which mortgage you can get and how much it is going to cost you. Applicants with a low credit score, indicating potentially risky financial behavior, are likely to have to pay a higher interest rate on their loan and, in some cases, may be rejected outright.
A small change in the percentage of interest you pay might not seem like much, but with many mortgages stretching from 25 to 35 years, it represents thousands of dollars of extra spending.
2. Whether You Get the Rental Property You Want
Not bought a house yet? Your credit rate still affects your choice of home. After your earnings-to-rent ratio, your credit score is the most important factor in deciding whether your rental application is accepted. Given the choice of two applicants with similar earnings, the one with the higher credit score will always win — landlords know that by reducing their risk, they save money.
3. The Car You Drive
In 2017, the average auto financing loan had an APR of 4.21 percent, with most loans falling between 3 percent and 10 percent APR. The difference between a great credit score and a very poor one is even bigger: Someone with a very bad record might receive as much as 20 percent, while some users with a great record can still get zero percent APR. The difference between the two can easily amount to hundreds or even thousands of dollars per year.
4. Your Refinancing Options
As interest rates change, what seemed like a good deal a few years ago can quickly become expensive; by refinancing your mortgage or student loan, you can save a lot of money. Unfortunately, if you have poor credit your ability to do this may be limited or nonexistent.
It doesn’t matter what your credit score looked like when you first got the loan, either. Many borrowers have a good score when they get their mortgage, then fall into bad practices. When they try to refinance, their now-reduced credit score limits their options and gives them a nasty shock.
5. Your Employment Opportunities
Many employers like to credit-check job applicants before making a hire, particularly if the role comes with a large amount of financial responsibility. Although they’re not lending you money, the business is exposing themselves to risk of another kind by putting their finances and reputation in your hands. By screening out applicants with a poor credit score, businesses aim to reduce workplace theft and fraud.
6. Taking Out a Student Loan
If you’ve already borrowed the maximum federal student loan amount, it’s likely you’ll need to turn to a private loan to make up the difference to cover your tuition. These private loans (issued by a bank, credit union or school) are affected by your credit score, just like a mortgage or auto loan. This can come as a shock to students who have only dealt with federal loans before (which aren’t affected by credit score).
You’ll probably be paying off your student loan for years to come — a poor credit score could add thousands of dollars to the amount.
The Impact Can Be Positive or Negative
We’ve primarily focused on the negatives of having a poor credit score in this article, but at the other end of the spectrum are a bunch of people who get great deals on everything. Their above average credit score enables them to get better mortgages, cheaper loans, and superior work and housing opportunities. And because their interest rates are lower, maintaining their score is easier — it’s an unfortunate fact that the high interest rates those with a low score receive make it harder for them to improve that score.
Achieving Your Desired Credit Score
There’s no such thing as an irredeemable credit score; with time, effort and discipline, anyone can improve their score and access better rates. But, it doesn’t happen overnight — it takes time. Which means that the best time to improve your score is always now. You need to start preparing your credit score in advance if you want to get the best deals on a mortgage.
Unfortunately, the information on your credit profile doesn’t always tell the whole story — through no fault of your own, this information can be incomplete or even inaccurate. When that happens, your best bet it to repair your credit profile.
Ovation Credit Services helps the 79 percent of consumers whose credit reports contain a mistake of some kind. Sign up today and take the first step toward repairing your reputation!