Your credit score is a numerical reflection of your credit history. The score is given as a 3-digit number between 300 to 850 and is an indication of how creditworthy you are. You can get both your credit report and credit score from Annual Credit Report.Com.
Generally, a higher credit score increases your credibility to lenders and opens you up to better terms of credit. On the other hand, the lower your credit score, the riskier you appear as a borrower.
More specifically, your credit score impacts your financial future in several ways:
1. Your Credit Score Influences Eligibility for Employment
When employers are vetting prospective employees, a large percentage also run a background check which may include credit checks. Notably, they cannot access your credit score but they can access your credit reports.
Credit reports give details of your borrowing and payment history, which can give a hint of how well you fair in your credit score. Some employers may take this as a reflection of how well you can handle money, your decision-making ability, and your potential to be involved in criminal activity.
Note: According to the Fair Credit Reporting Act, prospective employers are obligated to inform you in writing if a credit check is a requirement in the hiring process and seek your written consent on the same.
2. Your Credit Score Determines your Qualification for a Loan
Whether you require a private, auto, or business loan, a good credit score is paramount. It is the biggest factor in determining whether your loan gets approved, the amount that you receive, and the interest rates of the loan.
Typically, for SBA and term loans, you will need a minimum credit score of 680. Still, business loan providers consider a score of between 640 and 700 as good. For an auto loan, you will require a minimum score of 660.
While it is still possible to get loans with a low credit score, your choices will be limited. Further, the few lenders who are willing to work with you will charge higher rates, significantly raising your monthly payments.
3. Your Score Affects Your Ability to Buy or Rent a House
Just like the case with other lenders, mortgage companies depend on your credit record to determine your eligibility for a mortgage. A good score, such as 760 and above, reflects your ability to honor your payments.
On the other hand, you might not strike a deal with many lenders if your score is 640 and below. If you do, they will impose high-interest rates to cover the risk of delayed payments or defaulting.
When you are looking to rent a house, it is common for some landlords to run credit checks. By so doing, they can only get your credit report and not your credit score. That said, there’s no minimum credit score to qualify you to rent.
However, a landlord may use your payment habits and your current debt to decide if they should approve you to rent or not.
5. Your Credit Score Determines Whether you Get Mortgage Refinancing or Not
Are you looking to lower the interest rate on your current mortgage? You can do that by refinancing. This can also help you get a shorter loan term, reduce your monthly payments, or switch to a fixed-rate mortgage.
To refinance your mortgage, the credit requirements may vary from one lender to another. Nevertheless, you will need a credit score of 620 and over for a conventional mortgage refinance. If you are lucky, you can get refinancing from government programs with a score of 580.
By contrast, if you want to try your luck with private lenders, you may need a credit score of up to 750. In any case, higher credit scores translate to higher chances of loan refinancing approval, better loan terms, and lower interest rates.
Besides your score, you will also need a minimum of 20% property equity and funds to cater for other costs related to refinancing.
The Bottom Line
Many aspects of your financial future are pegged on how you have handled your financial responsibilities in the past. Your credit score is a good indicator of this information. With good credit, you can live more comfortably, access financing when you need it, and avoid extra expenses brought about by a low score.