Need to apply for a mortgage, auto or a personal loan? Whenever you apply for credit, lenders will check your credit score to see if you qualify for a loan. But what exactly is a credit score and why is it so important?
A credit score is a three-digit number that is a strong indicator of how likely you are to pay back the debt you owe, based on your past borrowing behavior. A higher credit score shows lenders that you are more likely to pay back the money you borrow. Likewise, a lower credit score signals a higher possibility that you may default on your loan. Although many people think that a credit score only matters in terms of whether or not you get approved for a loan, its importance actually goes beyond that. Your credit score can have a significant impact on other areas in your life.
A credit score is used to determine whether you get approved to borrow money to finance a house or car, your college tuition, or even to start up your own business. In addition, it is also used to determine how much credit you qualify for and what the interest rate of your loan will be. This means that if you have a higher credit score, you will be rewarded with lower interest rates, thus saving you a lot of money in fees.
Having a Low Credit Score
Most of us already know that if you have a low credit score, it is difficult to find a bank or credit card company to lend you money. But unfortunately, having a low credit score doesn’t just stop there. Not only does your score affect whether or not you can borrow money at a low interest rate, but it impacts other areas, such has insurance rates and employment opportunities.
Your credit score will likely play a role in determining your premium when you apply for auto or homeowners insurance. A low credit score can cost you hundreds of dollars in additional premiums each year.
Sometimes employers check your credit history because they believe that it is an indicator of how responsible you are. Many jobs that deal with money on a daily basis require applicants to be responsible in handling cash.
Many landlords do a credit check on potential tenants. Having a low credit score may indicate to the landlord that you might have trouble paying the rent on time.
Your credit score and history is one of the most vital parts of your financial life. Even if you have a high income, if your credit score is low, you may still be denied for lines of credit. Lenders want to minimize the risk that borrowers will default on their financial obligations. If you have bad credit, it is not the end of the world. By doing your research, you can learn about the factors that impact your credit score and implement ways to improve your credit score.