Have you checked your credit score lately? No? Well, you need to.
Your credit score is an important part of your financial life and future. Your credit report is like a file on you and your credit history. It basically tells lenders how risky of a borrower you are. So when it comes time to purchasing your new home or new car, you want your credit report and credit score to be in top financial shape!
It tells lender how risky of a borrower you are and yet many people do not really understand the importance of having good credit. Your credit score, also known as FICO, can range between 300-850.
- If your credit score is above 760 then that is considered excellent credit score.
- If you have credit below 620 then you are considered a subprime borrower or more risky.
Your credit score is used when lenders loan you money for your credit card, car loan and mortgage. And although the difference between 620 and 760 may not seem like a big deal to you, it can mean a difference of hundreds of thousands of dollars. The higher your credit score, the lower the interest rate you may qualify for when seeking out a loan for a car or home. The lower the interest rate on your loan, the less interest you will pay over the course of the loan, which results in saving you lots of money overtime!
Let’s look at this example to see why having a good credit score will save you lots of money in the long run. Okay, so you are now ready to buy your first home. You work with a mortgage broker to pre-qualify for a $500,000 30 year fixed home loan.
- Let‘s say your credit score is 620. Therefore the interest rate on the loan = 5%,which equals a monthly payment of $2,685/month
- That monthly payment over the course of 30 years =$966,600
- So, on your $500,000 mortgage loan you will pay ≈ $466,600 in interest over 30 years
- Now, let’s say your credit score is 760. Therefore the interest rate on the loan is= 3.5%,which equals a monthly payment of $2,245/month
- That monthly payment over the course of 30 years =$808,200
- So, on your $500,000 mortgage loan you will pay ≈ $308,200 in interest over 30 years
So, just by having the better credit score, you could potentially save $158,400 in interest over the course of 30 years! Now, that is a lot of money!
Hopefully, you now understand why having a good credit score is very important. To find out what factors go into your credit score calculation, watch my video Credit Score Calculation demystified! 5 Factors that affect your credit score.