Do you know your credit score? Credit affects more aspects of your financial life than you may realize — the ability to buy a house or car, get a credit card, rent an apartment, or even get a job can be affected by your credit score. To help you better understand the importance of credit scores, Odysseas Papadimitriou, CEO and founder of the personal finance website WalletHub shared five key reasons why you should know yours.
Better interest rates on loans
The most obvious reason it’s important to know your credit score is because your score determines your ability to qualify for loans and get better interest rates when borrowing.
If you know your credit score, a little research can let you know how much you should pay interest on a loan before applying. For example, according to recent data, a consumer with a credit score of 720 can expect an interest rate of about 3.56% on a $250,000 mortgage with a 30-year term. So if you know your score is a 720 and a bank offers you a rate of 4%, you know you need to look further.
I realize the difference between a 3.56% and 4% mortgage rate may sound trivial, but the higher rate translates into over $22,600 in additional interest over the life of the loan. that is why it is so important to know your score before applying for a loan.
The best credit card rewards
According to Papadimitriou, the most compelling credit card-related reason for knowing your credit score isn’t necessarily about getting a lower interest rate. After all, even the best credit cards typically have significantly higher interest rates than other forms of debt, and many cards marketed to consumers with only “good” credit scores have an introductory period of 0% APR.
The big difference is the amount of rewards you can expect, which has the net effect of a lower interest rate.
Some rewards programs can be quite lucrative – my personal credit card, for example, is the Capital One Venture Rewards card. The card has one of the best rewards rates in the industry: two miles per dollar on all purchases, which is basically 2% for travel. Plus, the 40,000-mile introductory bonus is worth $400, more than enough to offset the $59 annual fee for several years. However, according to Capital One, the card is only available to consumers with “excellent” credit.
It can help you find a job
Now not all employers check your credit, and those that do only see your credit krediet report, not your score. However, a low score can be an important indicator that you are in trouble. “Your credit score reflects the quality your credit report,” says Papadimitriou. “A low credit score doesn’t necessarily mean something is wrong, but it does mean you should check your credit report before applying for a job.”
Papadimitriou also points out that younger job seekers may have lower credit scores because of a lack of experience using credit, not because of irresponsible use. However, if two qualified individuals apply for a job — one with a long, excellent credit history and another who got their first credit card two months ago — it can make a difference in the hiring decision.
You will understand how scores move
Credit scores change often and it’s important to know your score on an ongoing basis, not just a snapshot. As Papadimitriou says, “actively monitoring your creditworthiness can help you understand how scores move.”
This is especially important because many people don’t understand how much of an impact certain events can have on your credit score. As a personal example, when my wife and I bought our house, we financed nearly $8,000 in furniture with a “60 months no-interest” deal from a local furniture store. For scoring purposes, this looks like a maximum credit card and immediately lowered my score by over 50 points – way more than I expected.
Keep in mind that such an impact is temporary. As you build a good payment history with the account and the balance starts to drop, those points will come back. However, the knowledge of how something like that can affect your score can be valuable. If I had to apply for a car loan, I could have been in serious trouble after that 50-point drop, so anticipating these things will help you time your trades better.
Your Score Affects Your Auto Insurance Premium — More Than You Think
It’s common knowledge that a better score can get you a lower interest rate on a mortgage or car loan (although many people may not realize that it can save you tens of thousands of dollars). However, many people don’t realize how much their auto insurance premiums depend on their credit score.
According to a WalletHub study, there is a 49% difference in the cost of auto insurance premiums between a person with excellent credit and someone with no credit history. And in certain areas, the difference can be even greater. For example, premiums fluctuate by 115% in Michigan, depending on credit history. In other words, people without credit pay more than double what customers with excellent credit pay for the exact same insurance.
To be fair, the difference between a good credit score and an excellent score won’t make much of a difference. However, if you keep an eye on your credit, you might be surprised at how much your premiums drop as your score rises.
The bottom line here is that your credit score plays a bigger role in your financial life than you might think, so it’s important not to be in the dark. Knowing your score is the first step to improving it, so if you have no idea what your credit score is, it’s a good idea to find out.