Why Your Credit Score Matters
Your credit score is a calculation used by lenders, insurers, utility companies, landlords and sometimes even employers to evaluate your financial responsibility. Their main interest: how likely are you to pay what you owe?
A higher score saves you money
Credit scores range from 300 to 850. The higher your score, the less risk you represent to a lender, and the lower an interest rate they can give you on a loan. The lower your interest rate, the more you save.
Take this example from www.MyFICO.com. A person with a score between 760 and 850 might pay a rate of 5.840 percent for a $300,000 30-year fixed rate mortgage (as of 3/5/08) with a monthly payment of $1,798. A person with a score of 580 to 619 might pay an interest rate of 9.205 percent and a monthly payment of $2,458. The person with the lower score would therefore pay $7,920 more a year for the same mortgage.
A low score can restrict your options.
It’s a painful fact that the worse your credit the fewer options available to you to improve your financial situation. Bad credit can prevent you from refinancing your high payment mortgage, or from obtaining a loan for a car, or from transferring high credit card balances to lower interest rate cards. You may have difficulty finding a landlord who is willing to rent to you without a co-signer or a high security deposit; utility companies may be reluctant to hook up your service.
How to keep your score high, or improve it.
The bad news is bad financial decisions can stay on your report for years. The good news is you can start improving your score right now. The first step is to check your credit report for errors. (You can get a free report from www.annualcreditreport.com. You’ll have to pay a fee to get your actual score.) Then be sure to make all your payments on time, no matter what. Keep your credit cards open, but don’t max them out. In fact, to avoid temptation, you may want to hide your cards in a drawer or a safe. If you have high balances, or are close to your credit limits, make paying them down your first priority.
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