I believe that one of the key tenets of financial stability is having the highest credit score possible. I realize some may completely dismiss this section after that first sentence, but please stay with me. Let me explain why I believe this to be the case.
Do you ever have a need to borrow money? If you’re honest with yourself, the answer is yes. For example, more than likely you’ll have to borrow money when you’re ready to buy a home. You’ve sacrificed and saved up money for several months, perhaps even years, for a down payment on your dream home!
Through all of that sacrifice, would you rather have the freedom to choose between multiple financing options, or be limited to one or two that are very restrictive? Whether you realize it or not, your credit score affects how much freedom or restrictions you have when you borrow.
Also, any time you borrow money, there’s always a cost to it. We call that cost interest. The interest you end up paying on any money you borrow will be in proportion to your credit score. Why? Because of risk.
One of the primary factors that lenders use in determining risk is your credit score. The lower the score, the greater the borrowing cost they have to charge in order to offset greater risk.
To illustrate the financial difference this can make, I went to www.bankrate.com and compared the interest rate on a 30-year, $200,000 loan for someone with a credit score of 740 to someone with a credit score of 670. Each year the person with the lower score would end up having to pay out an extra $744 in loan payments. Could you find better use for $744 a year in your family spending plan? I know I can.
Finally, your credit score is used to make decisions about you even when you’re NOT borrowing money. Do you need a place to rent if you don’t own a home? Do you have a need for Internet, cable, or electricity service in that home? Even though you’re technically not borrowing money in these circumstances, the business providing the service or renting the property to you must know whether or not you’ll be able to make the monthly payments!
Many people don’t realize that your credit score is a primary factor in helping businesses make this determination. For example, if it’s a low score, a landlord may require the first and last month’s payment up front as opposed to only having to pay the first month’s payment if you have a good credit score. The electric company may require a large down payment. Both of these examples require you to spend more of your hard-earned money because of a low score!
Personally, I always want to choose financial freedom rather than be given limits if I can help it. A very simple step you can take towards increasing your freedom and likewise improving your financial stability is to know your credit score, which matters too.
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If you purchase your credit score directly from Experian, TransUnion, Equifax, AnnualCreditReport.com, or any “free” credit score websites, you will NOT get your true FICO Score. You will be wasting your money on a generic and useless version of your credit score that no lender will ever see. The only one you need to focus on is from FICO–Fair, Isaac and Company.
FICO created the formula that credit bureaus use to determine credit worthiness and ultimately your credit score. FICO’s main website is full of all kinds of reports and services you can buy, so I included a link in the Resources page to the exact report you need to purchase in order to receive your true FICO credit score.
So how has your credit score impacted you for better or worse? I’d love to hear your thoughts in the comments below!
