In recent years, a simple three-digit number has become critical to your financial life.
This number, known as a credit score, is designed to predict the possibility that you won’t pay your bills. Credit scores are handy for lenders, but they can have enormous repercussions for your wallet, your future, and your peace of mind.
How Your Credit Score Affects You
If your credit score is high enough, you’ll qualify for a lender’s best rates and terms. Your mailbox will be stuffed with low-rate offers from credit card issuers, and mortgage lenders will fight for your business. You’ll get great deals on auto financing if you need a car, home loans if you want to buy or improve a house, and small business loans if you decide to start a new venture.
If your score is low or nonexistent, however, you’ll enter a no-man’s land where mainstream credit is all but impossible to come by. If you find someone to lend you money, you’ll pay high rates and fat fees for the privilege. A bad or even mediocre credit score can easily cost you tens of thousands and even hundreds of thousands of dollars in your lifetime.
You don’t even have to have tons of credit problems to pay a price. Sometimes all it takes is a single missed payment to knock more than 100 points off your credit score and put you in a lender’s high-risk category.
That would be scary enough if we were just talking about loans. But landlords and insurance companies also use credit scores to evaluate applicants. A good score can win you cheaper premiums and better apartments; a bad score can make insurance more expensive and a place to live hard to find.
Yet too many people know far too little about credit scores and how they work. Here’s just a sample of the kinds of emails and letters I get every day from people puzzling over their credit:1
- “I just closed all of my credit card accounts trying to improve my credit. Now I hear that closing accounts can actually hurt my score. How can I recover from this? Should I try to reopen accounts so that I can have a higher amount of available credit?” Hallie in Shreveport, LA
- “How do you get credit if you don’t have it? I keep getting turned down, and the reason is always ‘insufficient credit history.’ How can I get a decent credit score if I don’t have credit?” Manuel in San Diego, CA
- “I am a 25-year-old male who made a few bad credit decisions while in college, as many of us do. I need to improve my credit drastically so I do not continue to get my eyes poked out on interest. What can I do to boost my credit score fast?” Stephen in Dallas, TX
- “I joined a credit-counseling program because I was in way over my head. But my wife and I plan on buying a house within the next three years, and she has expressed concern that my participation in this debt management program could hurt my credit score. What should I do to help my overall chances with the mortgage process and get the best rate possible?” Paul in Lodi, NJ
- “I’m 33 and have never had a single late payment or credit issue in my life. Yet, my credit score isn’t as high as I thought it would be. What does it take to get a perfect score?” Brian in South Bend, IN
What these readers sense, and what credit experts know, is that ignorance about your credit score can cost you. Sometimes people with great scores get offered lousy loan deals but don’t realize they can qualify for better terms. More often, people with bad or mediocre credit get all the loans they want, but they don’t realize the high price they’re paying.