At this point in your life, you know what a credit score is and that it’s very important. In fact, it might be the most important number in your life. However, like most people, you probably put very little thought into what this number actually is, what it means and how it works for you. You know the basics; pay the bills on time, keep your balances low and keep your credit score as high as possible (somewhere over 700, right?) and you are pretty much guaranteed approval on loans, mortgages and car notes. However, you don’t know exactly what it is. Why should you? As long as it’s high, what’s the point in bothering with it?
The point is that this is the most important number in your life. This is the most important number you will ever encounter because in a sense, this number controls every aspect of your life. It controls what you do for a living, how you live and what you can afford. This is the most important number in your life, and you have to learn precisely what credit scores are, how they work and what they mean for you in your life.
What are Credit Scores?
Essentially, your score is a number. It’s a number that determines how financially worthy you are. Traditionally, the higher your score the better off you will be in life. However, sometimes that’s not always the case. In fact, sometimes the world works against most people and lenders have to adjust their creditworthiness considerations or risk losing their business and their profit. For example, someone with an 800 score is considered very worthy. But that does not mean that this particular person can have anything that he or she wants. What this means is that this person is more likely to garner approval on loans and other things.
A high score does not mean you are rich. It just means that you live well below your means, you pay your expenses on time and you keep your balances low or non-existent. What a high score means for creditors is promising; you are a person who is likely to pay back your debts on time and according to the contract you sign. Their risk of losing money on you is very low. This makes it highly likely that lenders will issue you a loan. But, you do have to have the income to pay back that loan. Many people believe that their very high credit score means they can have anything they want, but they cannot have it if it does not fit within their means of life.
How Does this Score Work in Life?
This number, this very important number in your life, works by allowing lenders to see your creditworthiness. Someone with a lower score, in the 500s for instance, is not going to get a loan. If they do, they’re going to get one with an interest rate so high it’s not even worth taking out the loan. The lower your score, the bigger the risk a bank or lender is taking on you. Let’s look at it like this:
Two people walk into a bank and want a loan for a half million dollars – we will call them Bob and Susan. Bob has a credit score of 630 and an annual income of $800,000. Susan’s score is 810 and she brings home $300,000 annually. Who do you think that lender is more likely to give a half million dollar loan to? Bob, because he makes a lot more money than Susan and can obviously pay it back far easier than she can?
No; the bank is going to choose Susan. She might not make as much as Bob, but she has a credit score that shows she is far more responsible with her money. Her score is going to show, based on how high it is, that her debt-to-income ratio is low, her ability to pay back her loans on time is perfect and she clearly lives below her means. Bob’s score is going to show a few potential issues; perhaps he has a lot of debt. Maybe he has trouble paying his bills on time every month because he lives well beyond his means. Or maybe he lost his job a few years ago and he didn’t mean to fall behind on his expenses, but he couldn’t help it. He could be working very hard to raise his score, but right now it’s just not where it needs to be.
Of course, Bob’s score is not bad; it’s okay and it’s not too far from good. He’s on his way. Perhaps the bank will give him the half million dollar loan he wants just like they are giving it to Susan. However, chances are high that Susan is going to get a much better interest rate than Bob because she is being rewarded for being so financially responsible, whereas the bank is looking to make as much as possible off of Bob and his lower score.
Why is My Credit Score Important?
Your credit score is important for several reasons aside from the obvious. You already know your chances of being approved for a credit card, mortgage or car loan – or any other loan – increase when you have a higher score. However, you might not realize just how much this little number affects your life in other aspects.
For example, did you know that you might not be able to find employment with a bad score? Many employers choose to take a look at the credit report of a potential employee as a way of seeing if they are financially responsible. This is something that is far more likely to occur when you apply for a job in a financial sector.
Additionally, if you rent, you might not be able to find housing with a low score. Those who have imperfect credit are often passed over for rental homes because homeowners would rather have financially responsible people in their homes.
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