If you’ve ever been denied a loan or a credit card, it was probably because of your credit score. So, what exactly does that score say about you and why it so important?
What is a credit score?
A credit score is a numerical representation of the potential risk you pose to a lender. It’s based on several factors about your current and past credit usage, such as:
- On-time payment history
- Types of debt you hold
- Length of credit history
- Amount of debt you carry
- Total credit limits available
- Number of new credit lines
Depending upon your specific mixture of these factors, you will typically have a credit score ranging from 300 up to 850. So, how exactly does this score impact you, the borrower?
The Impact of Your Credit Score
Lenders use your credit score to determine the interest rate they will apply to the loans or credit cards you apply for. The higher your credit score, the lower the interest rate. A high (good) score says you’ve used credit carefully and managed your finances well. If you haven’t managed debt well, you’ll get a lower credit score and a higher interest rate. The higher the interest rate you get, the higher your monthly payment will be. This is why it’s so important to try to maintain a good credit score — it means you’ll have more affordable monthly payments.
For example: If you needed a 24-month car loan at $10,000 with a credit score of 730, your interest rate could be around 2.79%, which equals a monthly payment of about $429. However, if your score was much lower at 599, your interest rate could be closer to 15.19%, which is a monthly payment of $485. That’s a $56 a month difference. Over the life of the loan, that would add up to more than $1,344 spent just in interest payments.
Other Credit Score Implications
Maybe an extra $56 a month isn’t a big of deal to you, but financial institutions are not the only organizations that use your credit score to make decisions about you and your future. Your credit score can affect many other areas of your life too, such as your ability to:
- Rent an apartment
- Put bills in your name
- Obtain certain jobs
- Receive affordable insurance premiums
These are just a few of the ways your credit score can impact your life.
It’s important to pay attention to your credit score and do your best to maintain a positive score. Typically a score above 650 is considered positive and shouldn’t limit your life significantly. If you do find yourself struggling to improve your credit score, visit your credit union for helpful advice and guidance.