Why Your Credit Score Matters More Than You Think

Last week’s article discussed what a credit score represents and how young people can build up their scores. Now it’s time to get into a bit more detail about why your credit score is so important.

The FICO credit score—the most widely used credit score for individuals in the US, and the one discussed in the previous article—ranges from 300 to 850. Of all people, about 60% fall between 650 and 800. A fairly typical score is 720. These scores play a critical role in determining both what credit you are able to obtain and at what rate of interest. But a fair question remains: Just how important are these consequences in credit and rates?


Even the difference between a score of 650 and one in the mid-700s can have a massive effect on how much one pays on things like car loans and mortgages. (And your credit score can be much worse than 650!) For example, a borrower with a credit score of 650 would end up paying over $1,300 more than someone with a score of 750 for a three-year car loan of $20,000. In other words, the lower-scored individual ends up paying a premium of roughly 6.5% on top of the other person’s car payments. Those numbers definitely add up over time.

The impact on a mortgage can be even steeper. Taking the same credit scores, the person with a score of 650 could end up paying over $20,000 more than the other borrower over a decade of a $250,000 mortgage. These numbers certainly vary based on how aggressively you compare rates and work other advantages, but the point is clear: Starting off with a bad credit score puts you at a large disadvantage—one that cannot easily be overcome.

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The examples so far deal largely with big purchases that aren’t really on the radar of most young people, but your credit score also has a large impact on smaller purchases and decisions that we make much more routinely.

For example, well in advance of taking out a mortgage on a home you purchase, you will probably end up renting an apartment of some kind. Many landlords now demand credit checks for their tenants to ensure that they will pay their bills on time. If your credit is particularly bad, you might prevent your entire housing group from getting a good rate, which won’t make you very popular with your roommates.

Apartment rentals are not the only screening points for credit these days: Many cell phone carriers issue credit checks before agreeing to trust your payments over the course of two-year contracts; insurance providers can use them to gauge your financial well-being and responsibility; and employers are increasingly using them to screen less-focused applicants. You might not end up dressing up as a pirate, as those different credit report ads imply, but there’s a good chance you’ll miss out on a job you otherwise might have had. And considering the relatively low difficulty of keeping your credit score intact (provided certain financial stability, which I understand everyone does not have), there is little reason to let it run amok.

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Your credit score has a lot of influence on the rates that you pay for different products. Unless you are fortunate enough to have been born with a large trust fund or have stocked away a ton of cash, it is very likely that you will have to borrow money at some point in your life.

Major purchases—higher education, housing, automobiles—are just too expensive for most people to finance out of their savings account. And even when you can manage to fund the purchases from that account alone, it might not be a wise decision to tie up so many of your assets in the purchase.

In other words, dealing with our credit score and its implications is a reality we will all face at one point or another. Given that inevitability, it makes a lot of sense to stay on top of it and to learn the ways it will likely affect you in the future. Just remember: Being responsible now will give you much greater flexibility and freedom in the future.


Image with courtesy of Free Credit Report.