Your credit score is an important part of your financial picture. Lenders combine your credit score with the information in your credit report to assess your risk as a borrower. If your score is high, you look like less of a risk; if your score is low, lenders may question your ability to pay what you owe.
It’s important to note that each credit reporting agency has different scoring models, so your credit score will vary between agencies. Additionally, your score is updated each time there is a request for a score, and new information received impacts the model.
Improving your creditworthiness takes time, but it’s worth the effort. Here are four reasons that it’s important to have a solid credit profile:
1. Your credit score can help you when you borrow money.
At some point, chances are that you will need to borrow money. If you want to buy a house, you will almost definitely have to take out a mortgage. Many people also borrow in order to buy a car.
A good credit score can save you thousands of dollars over the life of a loan. For example, you may get a better mortgage interest rate with a high credit score than you would with a lower score. On a 30-year mortgage for $200,000, the savings can be significant.
If you can get a rate of 4.29 percent on a $200,000 mortgage, your total interest paid will be $155,884. But if you have a lower credit score and only qualify for a rate of 5.5 percent, you will instead pay $208,808 in interest over the life of the loan, or nearly $53,000 more. On top of that, you will also have a higher monthly payment.
The same principle applies whether you are borrowing for a car, an education, or a personal loan: The better your credit score, the more you can save when you decide to borrow.
Keep in mind that the score your lender sees may be different from the score you see, depending on the credit reporting agency your lender uses to pull your scores.
2. Your credit score can impact your insurance premiums.
While some states prevent insurers from using your credit score for setting insurance premiums, many states do allow it. And with a lower score, you could end up paying more each month for coverage.
However, you could pay hundreds of dollars less in insurance premiums over your lifetime by improving your creditworthiness and positively impacting your credit score.
3 You may qualify for better terms when you sign up for cable or Internet.
Many Internet, TV, and cell phone service providers now check your credit before they set you up with service. In some cases, if your credit is poor enough, you might be denied an account.
Even if you aren’t denied service, you might have to pay a security deposit or pay some part of your service up front. This can be frustrating and costly as it can change your monthly cash flow and strain your budget.
4. Access to better financial deals.
When you have good credit, you have access to better financial deals and opportunities. You may be able to refinance your home to a lower interest rate; you might have access to better rewards credit cards with lower interest rates; and you might even be offered checking accounts, investment accounts, and credit cards with signing bonuses. Having access to these financial deals may help you better manage your resources in the long run.