You might not think about your credit score every day, but it matters and has a lot of power. This score is how lenders and creditors measure your financial responsibility and predict whether you will repay them on time. Here are three reasons why your credit score matters more than you might think when you’re looking for something as simple as a car loan:
1. Credit Scores Are Your Financial History
Five major factors determine your credit score:
- Your payment history (35%)
- How much you owe (30%)
- How long you’ve had credit (15%)
- The types of credit you have (10%)
- The mix of credit in your name (10%)
Each factor plays a vital role in determining your credit score. Payment history counts for 35% of your score, meaning that the sooner and more often you pay your bills on time, the better. The second most important factor is how much you owe. If you owe a lot of money relative to what you earn, it could be a sign that you may need to take steps to improve your finances.
The length of credit also matters. If you don’t have any significant negative marks on your report, then having older accounts will work in your favor. The same goes for types of credit and the range of those accounts; having both revolving and installment accounts will be better than just one or the other. Finally, 10% is determined by whether there is a mix of different types of loans on your report. Having different types of loans shows lenders that if one account is maxed out or closed due to missed payments, another account can cover it.
Your credit report is a record of your financial history. It shows lenders and other financial institutions if you can pay them back.
2. Your Credit Score: The Difference Between Being Approved and Denied
If you have ever tried to buy a car or get a mortgage, you know that lenders often request your credit score before making their final decision. If you have a high credit score, your application will likely be approved because you have demonstrated financial responsibility. It is a different story if you have a lower credit score.
When your score is low, it means that lenders perceive you as more likely to default on the loan. As a result, your mortgage or car loan may be denied by the lender. These loans have strict requirements due to the amount of money. In addition, any landlords check a potential tenant’s credit history before approving them to move in. Your credit score matters because it can either get you closer or farther away from achieving your goals.
3. The Lifetime Cost of a Low Credit Score
If you are interested in a loan, your credit score will be key. A lower credit score could result in higher rates for mortgages, car loans, and even credit cards. Over a lifetime, an individual with low credit may be required to pay over $100,000 more than someone with a high credit score in interest rates alone. The same exact home or car would cost much more for someone with a low credit score.
In addition, potential tenants with low credit scores may be required to pay a higher deposit before moving into a new apartment or home. Insurance companies also check your credit before providing you with coverage. They may charge you hundreds more if your score is low. The lifetime costs of a low credit score are more than most people think.
Your credit score is one of the most important aspects of your financial life. Your credit score can mean the difference between being approved for a loan or not being approved at all. It can also determine if you will get a great deal or pay more.
