It may only be a three-digit number, but you would shoot yourself in the foot if you underestimate the far-reaching effects of a credit score. Of all the numbers that would be associated with you in your lifetime, one of the most important is your credit score.
You must know your credit score and work to increase it because that score has implications on where you would live, the type of loans you can get, and how your life would turn out in general. Let’s begin by taking a look at credit scores.
What is a Credit Score
A credit score is simply a three-digit number that lends insights on how you have performed on your loans and credit over time. It is a measure of how much risk a lender is taking on you: your creditworthiness or your ability to repay a loan. Credit scores generally range from 300 – 900. Here’s an idea of what rating you get based on your credit score
- 760 – 900 Excellent
- 725 – 759 – Very Good
- 660 – 724 – Good
- 300 – 559 – Poor
Unfortunately, not everyone knows their credit score or even keeps tabs on it. Thankfully, in many countries, there are free resources you can take advantage of. For instance, you can check your credit score for free in Canada without paying a dime. In the US, you can also request one free credit report each year from the major reporting agencies, such as Equifax and TransUnion.
Now, let’s take a look at why your credit score matters.
Higher Chance of Employment
Did you know that for an increasing number of employers, your credit report is a vital part of the recruitment process? Your professional, well-formatted resume and cover letter along with all your credentials won’t cut it anymore – you need to have a track record of prudent financial habits.
Employees want to ensure that your money spending habits won’t affect your work. For instance, if you are applying to work in a bank where you’re going to deal with large sums of money, employers have to make sure you are financially stable. If your debt level is unreasonably high for the salary on offer, you might be denied the position. Additionally, a promotion or a raise would likely be preceded by a credit report check.
Lower Interest Rates
Generally, a good or increasingly better credit score report gives financial institutions confidence that you won’t default on your debt repayment. In turn, they offer their best interest rates. So, if you have a good credit score, you are likely to receive low credit card rates, as well as low rates on loans. This increases your chances of paying back and ultimately building a good credit history.
Even home and car insurance rates are affected by your credit score report. If your score is below a given standard, you may be required to pay more home and auto coverage. Furthermore, a good credit score gives you more negotiating power. You can bargain for lower interest rates on your loans or when you are upgrading to a new credit card. You can use offers from other companies as a bargaining chip to secure the lower interest or higher amounts of loans.
Higher Chance of Receiving a Loan
At one point or the other in your life, you’ll need a loan. Whether it’s a mortgage, auto loan or even a business loan, you’ll need to give the lender some confidence through your credit score. Here are some types of loans that depend on your score.
Business Loans
If you’re starting a business, you will do yourself a world of good by having a good credit score report. Bad credit will certainly endanger your chances of receiving funding, grants or loans to kickstart or shore up your business.
Mortgages
Your financial health will, to a large extent, determine where you live. Mortgage lenders will only lend to you if your credit health is good. Even if they consider a bad credit score, you might have to pay high interest. If you are looking to rent an apartment, chances are, your landlord/landlady might make a decision based on credit health.
Auto Loans
Your dream car may just remain a dream if your credit history is suspicious. Like other industries, most lenders in the automotive industry would want to see a track record of financial integrity in honoring payments before parting with their money.
In Conclusion
Your credit score is, perhaps, the most important three-digit number in your life. It will determine whether or not your life will be fulfilling. From upgrading your credit cards, taking mortgages, taking loans, to signing up for insurance, there’s almost nothing you can do without a credit score.