Your credit score might seem like a minor detail in the grand scheme of your life. But it can play a big role at certain points—namely when you need to borrow money. These are a few reasons why your credit score matters.
Your Credit Score Determines Your Interest Rates
Interest rates are arguably the most important thing to consider when it comes to your own debt. While it might just feel like a number that’s there when you take out a loan or get a credit card, your interest rate can be a massive determinant in how much you pay on a loan.
Along with interest rates set by the Federal Reserve, your credit score is going to help determine the actual interest rate you’ll receive on a loan. Why does credit score matter for this? Because lending institutions don’t see all consumers in the same way.
If you’re someone who has never missed a credit card payment and has consistently held a credit score in the 700s or higher, you’re typically considered pretty low risk for receiving credit. Banks and other lenders typically want to attract people who they think will pay them back in a timely manner, with a little bit of interest added on top.
People who, on the other hand, have a history of not making payments on time or having debts go to collections will receive much less favorable rates. This is because the people lending the money can’t be as sure they’ll get it back. The higher interest rate is essentially a way for them to hedge their bets in case the consumer doesn’t repay the loan.
Over the course of a mortgage, a few percentage points in your interest rate can make a huge difference in the amount you pay on the loan. This is the case with any kind of debt, but especially the longer you owe money. Keeping a high credit score will get you more favorable interest rates, and let you pay less in interest on your balances.
Your Credit Score Determines Whether You Can Borrow Money
Do you need to take out a loan in order to buy a house or car? Your credit score is going to make a big difference in how smoothly the process goes for you.
People with good credit typically don’t have trouble getting approved for a loan assuming it’s within their ability to pay it back. Those with poor credit, however, might not even be able to borrow money at all. When your credit is too low, some lenders might decide it’s not worth lending money even with a high interest rate.
People struggling to get a loan due to poor credit should look for ways to boost their credit score over time. Paying bills consistently and on time is the most surefire way of doing this. But what about if you’re at the point where you don’t think you’re going to be able to pay back what you currently owe?
People in this situation might want to get in contact with a debt relief organization like Freedom Financial Network. If settlement can bring your debt down to a more reasonable level, it tends to be easier to pay it off and start rebuilding your credit.
You Never Know When It Might Come in Handy
It’s important to have your credit in a place that makes it possible for you to borrow money at a reasonable interest rate. You don’t know what the future holds for you. Someday, sooner than you might think, buying a house or car might be a real possibility for you. Having to settle with high interest rates because of a low credit score can make that dream much less achievable.
It’s wise to take steps now that will help you get to a place where you can easily borrow money when you want or need to. Having a good credit score is a key part of that process.