Part 1 – Credit Scores 101: What It Is and Why It Matters

by | Mar 24, 2016 | Personal Finance 101 | 0 comments

If we told you a number between 300 and 850 could save you thousands of dollars, would that grab your attention and get you interested in learning more? Then pay attention because that aforementioned number is your credit score, and this post, Credit Scores 101, will help you learn about what it is and how exactly it could save you money.

Virtually every adult has a credit score. If you’d ever had a credit card or taken a loan, you have a credit score. Its main purpose is to measure your creditworthiness, or the likelihood that you’ll pay back loans or credit card balances, for potential creditors. There are three credit bureaus — Equifax, Experian and TransUnion — that measure your credit score, and their calculation methods vary slightly so while you should have the same general rating at each bureau, the actual numbers may vary slightly.

Your credit score is placed in one of four tiers, depending on the actual number. A score from 300 to low-500s is considered poor, mid-500s to mid-600s is fair, high-600s to low-700s is good, and a score of 720 or higher is considered excellent.

So why does your credit score matter? It helps lenders decide whether they should give you a loan or line of credit that you apply for, based on the likelihood that you will be able to pay it off. Perhaps more importantly, it helps determine the interest rate you will pay when the loan is issued. The higher your credit score, the less risk the lender is taking and the more likely they will be to give you a lower interest rate, which goes back to our original point of a good credit score saving you money.

If you’re applying for a mortgage loan in the six figures, if an excellent credit score can lower your interest rate by even one percent, that could save you a lot of money over the term of the mortgage compared to paying a higher rate because of a worse credit score. The same thinking applies, on a smaller scale, when taking out a car loan. The loan won’t be as much as it is for a mortgage so a higher score won’t save you as much, but it’ll still save a nice chunk of money. And what can be more important than that?

Now that you know the basics of what a credit score is and why it’s important, stay tuned to the blog to learn more about credit scores, including what determines the number and ways to help keep your credit score up. And feel free to contact us for any questions about your financial portfolio.