9/11/2013 3:00 PM ET|
How important are your credit scores?
They can seem like an arcane, abstract number, but your credit scores dictate your financial life.
“How important is your credit score?”
That question was posed to me recently as I stood onstage after delivering a presentation on how to optimize your credit to a group of some 500 women for the annual Women’s Money Conference in Las Vegas. I only had a few moments to summarize the importance of credit scores to the audience and tell them that, with a strong credit score, they may save thousands of dollars each year. With more time and preparation, though, this is the answer I would have given:
A good score = money in your pocket
Low credit scores cost consumers money; in some cases hundreds or thousands of dollars.
“A lower credit score can result in a borrower having to pay more than $5,000 for a $20,000, 60-month auto loan,” warns Barrett Burns, CEO of VantageScore Solutions. But most people don’t realize that. “According to our joint survey in partnership with Consumer Federation of America, nearly 80 percent of respondents were not aware of this important fact.” The two organizations have created a credit scoring quiz consumers can use to test their knowledge.
“A good credit score can save a person thousands of dollars over the lifetime of a loan or mortgage by helping them secure a lower interest rate,” agrees Antony Sprauve, director of public relations for MyFICO. He points to a calculator on the MyFICO website that provides updated information about average interest rates on various types of loans by credit score.
Using that calculator today, for example, the average monthly payment on a 30-year fixed-rate mortgage of $250,000 is $1,077 for someone with a FICO credit score above 760. For someone with a credit score of 680-699, however, the payment is $1,133. Over 30 years, that difference adds up to more than $20,000!
But the money you can save with good credit is just the beginning.
Catch the drip before it’s a flood
If you are monitoring your credit scores and they start to drop, that’s valuable information. It can warn you that your finances are starting to head in the wrong direction, and that a little course correction may be in order.
If your credit card balances start to creep closer to the limits, for example, you may not realize there’s a problem since your minimum payments don’t rise that much each month. But over time, that increase in debt may become quite large. Your credit score will reflect how close you are to your available credit limits on your cards, and may alert you to the fact that you need to investigate ways to reduce that debt.
Or a change in one of your scores can indicate a much bigger problem. If it takes a dive but nothing significant has changed in the way you handle your finances, then it may reveal that you are the victim of a credit report mistake, or worse, identity theft. If you aren’t monitoring your scores, you may not know that there’s an issue until it has wrecked your credit.
Boost your job prospects
Employers don’t obtain credit scores; they only receive credit reports. But the information that goes into calculating a credit score is the information in your credit report, so the two are closely related. Nearly half of employers check credit reports for at least some applicants, so staying on top of the information in your reports can be helpful if you are looking for a new job.
And even if you’re not job hunting, knowing your credit is in good shape can make life a little less stressful.
Keep it all in perspective
So, yes, your credit score is important, much like saving for retirement or creating a spending plan. Still, if your credit scores have been damaged as a result of the economic downturn of the past few years, don’t beat yourself up. Over time, financial wounds can heal and the scars on your credit will disappear. That’s especially true if you are proactive about monitoring your credit and maintaining good credit references to rebuild your credit going forward. You can monitor your credit reports for free from each of the three major credit reporting agencies once each year through AnnualCreditReport.com.
As my colleague Adam Levin likes to say, your credit report should be a resume, not a rap sheet. And writer Donna Freedman (@DLFreedman) tweeted in a recent financial chat: “A credit score is a useful tool. It is not a religion.”
More from Credit.com:
VIDEO ON MSN MONEY
Credit scores and their "importance" are pretty much nothing more then an excuse for businesses to charge extreme rates and fees to the masses. They make no sense half the time, and are pretty much set up (of course) to penalize the consumer at every twist and turn. Like many tricks and tools of the financial and business worlds, their use and importance has been overblown and abused- really, I'm a bad driving risk because I was late with a credit card payment and even though I have a perfect driving record (several decades old), that ding in my credit report means higher insurance rates??!
While many businesses continue to operate while dealing with lawsuits, bankruptcies, bad press, stupid decisions, etc., they continue to demand perfection from the consumers who do business with them, while making it very hard to do so. But they like it that way, far better to pummel the sub-700 credit scores with higher interests rates, payments, and fees then see their profits diminish with credit score "perfection".
My husband had 12% credit card utilization, with a score of 835. When we paid off debt, his score dropped 20 pts.
Pay cash and don't even worry about what your score is.
The American public has allowed VISA and Mastercard to control their lives. Stop it here and now.
Are you being forced to get your pay on a debit card? Why?
However, keep your eyes and ears open to States banning cash sales like Louisiana just did this year.
Google it. Kinda strange coming from a republican Gov. Thought they believed in the Free market?
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
TIPS FROM OUR SPONSOR
RECENT ARTICLES ON CREDIT SCORES
The Consumer Financial Protection Bureau's complaint database highlights the worst problems people have with collectors.