Here’s When Your Credit Score Really Matters
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“Open a credit card so you can start building credit.”
“Don’t miss a payment or you’ll trash your credit score.”
“Check your credit report annually so you know what’s on it.”
If you’re like most people, you’ve probably been inundated with advice on managing credit. It comes from parents and financial bloggers, books and television. But have you ever stopped to consider why your credit score matters so much?
5 times your credit score really matters
1. Buying a home
Chances are, your home is the biggest purchase you’ll ever make, and you’ll need a mortgage to make it. Nearly 80% of homes purchased in the U.S. involve some sort of financing, according to the National Association of Realtors.
“Having good credit will help a consumer get a better rate and closing costs,” said David Hosterman, regional manager at Citywide Home Loans in Centennial, Colo. “For instance, if a client has a 740 credit score or higher, they’ll typically get the best rates and closing costs a lender can offer.”
But let’s look at what that means for you in real dollars. Say you’re shopping for a $250,000, 30-year fixed rate mortgage. According to myFICO.com’s Loan Savings Calculator, here are the average APRs — as of Jan. 17, 2019 — you can expect depending on where your credit score falls:
|Credit Score||APR||Monthly Payment||Total Interest Paid|
On a small, short-term loan, the difference between a 680 credit score and a 760 credit score might not be all that significant. But when you’re talking about borrowing hundreds of thousands of dollars over 30 years, you can bet your credit score really matters. Over the course of a 30-year mortgage, it could save you more than $21,000.
2. Renting a house or apartment
Homeowners aren’t the only ones who need credit to secure housing. According to a report from TransUnion, nearly half of landlords say the results of a credit check are among the top three factors they use when deciding whether to accept a tenant’s lease application.
A bad credit score might prevent you from living in a home, apartment or neighborhood you love. If you are able to get your lease application approved, you may have to pay a higher deposit or upfront rent payments.
3. Buying or leasing a car
Auto lenders use your credit score to gauge your ability to repay debt, so getting an affordable auto loan with poor credit can be a challenge.
According to ValuePenguin’s Average Auto Loan Interest Rates for 2019, consumers with credit scores of 720 to 850 see an average interest rate on a new car loan of 3.60%, while buyers with scores between 500 and 589 see an average rate of 15.24%.
Let’s look at that in real numbers. According to Kelley Blue Book, in December 2018, the average transaction price for a light vehicle in the U.S. was $37,577. So let’s say you’re financing $32,000 of that purchase over five years (60 months).
|Credit Score||APR||Monthly Payment||Total Interest Paid|
As you can see from the table above, the difference between a credit score of 720 and a credit score of 500 is significant. It can save you nearly $11,000 over the course of five years.
4. Starting a business
Having a poor credit score can impact your ability to fulfill your dreams of entrepreneurship.
“Credit matters a lot when starting a new business and growing an existing business,” said Priyanka Prakash, senior staff writer at Fundera, a marketplace for small-business loans and credit cards.
According to Prakash, aspiring business owners with credit scores over 700 are eligible for the lowest-rate business loans from banks and the Small Business Administration (SBA).
“If your credit score is under 600, then your only options are really an online loan or a merchant cash advance, which have very high interest rates,” Prakash said.
How high? According to Fundera’s Business Loan Interest Guide for 2018, APRs on merchant cash advances can range anywhere from 40% to 150%, while traditional bank loans average 3% to 6%, and SBA loans average between 7.5% and 10%.
5. Applying for a job
When you interview for a job, you expect the employer to review your job application or resume, call your references, and confirm you have the necessary experience and education to get the job done. But are you anticipating a credit check?
According to a 2016 CareerBuilder survey, 72% of employers conduct background checks on employees before they are hired, and of those, 29% perform a credit check.
Why? Often, employers use your credit history to judge whether you are responsible and trustworthy. Especially in jobs that involve handling money, dealing with sensitive client information or accessing financial data, many employers want extra assurance that you won’t commit fraud.
A reminder on credit scores
Your credit score is a three-digit number ranging from 300 to 850 that lenders use to make decisions about you.
Here’s how credit scores break down, according to the FICO® scoring range:
|800-850||Exceptional||You’ll likely have an easy approval process when applying for new credit and receive your best rates from lenders.|
|740-799||Very Good||You will likely get better than average rates from lenders.|
|670-739||Good||You are considered an “acceptable” borrower and may get average rates from lenders.|
|580-669||Fair||You may be considered a subprime borrower. Getting credit may be difficult, and interest rates are likely to be higher than average.|
|300-579||Poor||You may be rejected for credit. Lenders willing to extend credit may require you to pay a fee or deposit.|