Your credit score, or FICO score, is a three-digit number that represents a statistical analysis of your creditworthiness. Your credit score is based on the information in your credit report, which is usually sourced from the three major credit bureaus. Why should you care about this score, and why is it important to maintain a high credit score? Because this score is the primary tool used by lenders when you apply for a loan. When you apply for any form of credit, the bank uses this score to determine the likelihood of your default on a loan, and whether you will make timely payments if they lend you money.
For instance: let’s say you want to buy a car, apply for a mortgage on your home, or get a credit card in your name. When you apply for the credit, your bank, credit card company or mortgage lender uses your credit score to evaluate the potential risk of lending money to you. Your credit score determines whether or not you qualify for a loan, and at what rate of interest you can borrow. Having a good credit score means you get better rates, higher credit limits, and other benefits. A lower interest rate translates to a very real savings to you over time.
For example, let’s say you are applying for a mortgage. If you have a credit score of 760 – widely considered a “good” credit rating. Your credit rating qualifies you for a 6.11% interest rate on a 30 year, $300,000 mortgage. Let’s say another person applies for the same mortgage, and they have a credit rating of 620 – the low end of “average.” That borrower might be quoted an interest rate of 7.42% – over a full percentage point higher. “Subprime” borrowers – those with credit scores below 620 – receive even higher interest rates, if they qualify for a mortgage at all. Over 30 years, the difference in interest rate can make a huge difference in how much each prospective mortgage holder pays out over time.
In addition to better interest rates, a high credit score may also entitle you to better rates on insurance or even utilities, as many companies can check your credit rating, including prospective employers and landlords. So keeping an eye on your credit rating is a good idea – it can pay dividends.