Everyone is always talking about credit scores, but why does your credit score matter?
Do credit scores even matter at all?
Yes and No.
It all really boils down to how you want to live your life. Do you want to borrow money to purchase things like cars or other large purchases? Or do you want to wait to purchase these things until you have the money?
Put simply, if you plan to borrow to buy a home or a car, then your credit score matters and an excellent credit score could easily save you thousands of dollars. Make sure to use Credit Karma or Credit Sesame to check your credit score for free!
Most people will borrow money to pay for school or a home. Fewer people decide to forego borrowing money altogether. There's no right or wrong answer, but most people will have a strong preference.
If you’re part of the second group, have no debt and don’t plan on using loans of any type (including mortgages), then your credit score does NOT matter all that much.
Here at The Finance Twins, we recognize that everyone is different. Some people have no problem with not owning (outright) the house they live in or the car they drive. For others, this drives them crazy. Let’s take a look at a few different areas where your credit score can make a difference.
How credit scores can affect: Personal Loans and Student Loans
In order to borrow money, your credit score is used by the lender to determine how likely you are to pay back debts. This is because a large component of the credit score is from on-time payments. If you have a high credit score, you have a good track record of paying your creditors. Good credit scores are rewarded with lower interest rates.
For student loans, this mostly applies to private student loans. Federal loans don't have interest rates based on legislation passed by the government, not your personal credit score. In addition, if you ever plan to refinance your student loans in order to save money, you'll get the best rates possible with a high credit score.
On the other hand, a low credit score may cause banks to view you as a risk. You may not have the best track record of always making payments on your accounts on time. In order to lower their risk, they may offer a loan at a higher rate or they might not approve you.
How credit scores can affect: Your Home
Credit scores will affect you when negotiating mortgage terms with a bank. In general, excellent credit (720+) will allow you to get better terms and lower interest rates. However, a credit score much higher than that won’t make a big difference.
For those, like us, who still rent: Some landlords check the credit of their future tenants to determine if they will be likely to pay their rent each month. This could impact the house or apartment you are able to rent.
How credit scores can affect: Credit Cards
Not surprisingly, having a strong credit history will help you obtain more credit cards. By demonstrating that you can pay your credit cards on time each month banks will feel more comfortable extending you credit.
Should you even want more credit cards? Not necessarily. But a strong credit score will also give you lower interest rates. In general, you should always pay your credit cards in full so that the interest rate becomes irrelevant, but if you ever fall into a pinch and need to carry a balance, you'll be glad if you have a lower interest rate.
How credit scores can affect: Stores and Shopping
If your washing machine or fridge breaks, you will be in a tough spot. You know you need to replace it, but those are not cheap items to replace. Hopefully, if you’ve read our post on emergency funds you can use that to cover this unexpected purchase.
If your emergency fund isn’t enough to cover the price, you may need to finance the purchase. Many stores offer financing for purchases. This is great for the stores for two main reasons. First, they are selling an item. Second, they will charge you interest so they are actually selling the item for more than it is worth. In general, these financing offers from stores are not a good deal.
Occasionally you will see a special offer of 0% interest if paid within 12 months, which could make a lot of sense for you! You just have to make sure you read the fine print to be sure.
As with other loans, if you have a high credit score, you will get the best interest rates! Starting to see a trend?
So, Do Credit Scores Actually Matter?
Yes, but in the grand scheme of life, no. They won’t make or break your future, but they could have an impact when trying to borrow money.
At the end of the day, the credit score is one indicator of your financial health. We don't think it's the most important indicator.
A high score doesn’t mean you have financial freedom by any means. It can often mean the opposite if you achieved that high score by having many credits cards and different loans. On the other hand, it can mean you always make your payments on time and utilize very little of your credit. Rather than fixating on getting a high score, focus on the bigger picture of your overall financial health.