At Credit Karma, we talk about credit scores a lot. It is in our name, after all. But while we cover credit myths, how to improve your credit health and a multitude of other financial topics frequently, we don't spend much time answering one important question: Why should you care? Does this three-digit number only matter when you apply for credit? Can it really affect your day-to-day life? Let's explore why your credit score may matter more than you'd expect.
What is a credit score?
In order to explain why credit scores are important, we need to start at the beginning. Simply put, a credit score is a three-digit number that uses information from your credit report to assess your creditworthiness. Basically, it's an indication of how likely you are to repay debts in a timely manner.
Why does my score matter?
Your credit score plays a pivotal role in your financial journey. As far as numbers go, it's one of the most important digits that'll ever be attached to your name. Here are some key aspects of your life it could impact:
Whether or not you're approved for credit. Many people scorn credit, but the simple fact of the matter is that in most situations, your credit score is a deciding factor in whether you'll be approved for a mortgage, car loan, credit card or another type of loan. Lenders want to be paid back, so if your score indicates that you're an unreliable borrower, you may not get the credit you need. And although there are loans available to those with weaker (or no) credit, you probably don't want to rely on payday loans, pawn shop loans or other loans with sky-high interest rates and fat fees.
How much you pay in interest. Want to save a lot of money? Improving your credit health can help you qualify for the best rates and terms. It may sound simple or too good to be true, but the higher your score, the less interest you're likely to pay each month and overall. Did you know that if you have a credit score of 650 and get a 30-year, $400,000 mortgage, you could pay over $70,000 more in interest than someone with a 750 credit score and the same mortgage? That's huge! Forget clipping coupons-- your credit score probably has the most potential to save or cost you your hard-earned money.
Other factors. If you don't plan on applying for credit in the near future, you may think that your score isn't that important. However, your score doesn't just affect your ability to get favorable loans and great credit cards. If you're looking for an apartment, your score may impact your probability of getting approved, the size of your security deposit and how much you pay in fees. It can also impact how much you pay for home and auto insurance and might even decide whether you're approved for a new cell phone plan. Clearly people other than lenders care about your credit score-- and you should too!
What should I do now?
Even if the credit scoring system doesn't seem fair to you, rebelling against the system by not monitoring your credit health isn't going to change the process. If anything, it may hurt you. At Credit Karma, we think that credit scores matter, so we offer a host of services that allow you to see where you stand in the credit world, get helpful tips for improving your credit health and utilize other tools and resources-- all for free. Try it out and let us know if you have any questions! We're here to help.
All things said, we'd like to end by emphasizing that you are not your credit score. Taking steps to improve your credit health is great and highly encouraged, but never let your credit score define you--it'll only drive you crazy.
About the Author: Jenna Lee is Credit Karma's Social Media Manager. Although her specialty lies in creating witty post-it notes, she also enjoys sharing all the financial information she's learned since joining Credit Karma in February 2012. When she's not working, you can probably find her trying out a new dessert recipe or learning/perfecting any musical instrument she can get her hands on. Say "hi" @leejennaa!
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