The Impact of Having Good Credit Score

Summary: Managing good credit efficiently leads to a good credit score; this will reduce your cost of borrowing. Great financial moves involve living within your means, paying debt wisely including good credit card minimum payments on time and every time. This will help reduce the amount you pay on interest and keep you with some more money to save and invest.

A lot of people do not know about the credit scoring system or even the score until they are about to purchase a home or get a loan to start a business or make any other major purchase. A Credit score is a three digit number which is used by lenders to make a decision on whether you are going to get a credit card, a mortgage or some other kind of loan. This three digit number also has a huge impact in deciding the interest rate you are charged at when you get the loan. The score is a summary of your chances of being risky to the lender during the course of the application. Every individual have their own unique good credit score, even married couples have their separate good credit scores. When couples sign up as co-signers for a loan, both good credit scores will be scrutinized. The riskier this score is to the lender, the loss likely the lender will release the requested loan and the more interest rate you will get to pay on that loan which implies that you will pay more when you borrow money. Credit Scores ranges from 300 to 850. When it comes down to calculating your interest rate, the higher the score, the better terms you will receive on a loan.

The most used good credit scoring system known was developed by Fair Isaac Corporation which is referred to as FICO score. There are three major bureaus which are Equifax, Experian and TransUnion. These three bureaus make use of FICO scoring model. The score from these three bureaus might not be the same exact score. This is due to the fact that lenders and other businesses report information to the agencies in different manner and these agencies process their information through their system differently. Due to the fact that lenders have different criteria of making a loan, getting the loan depends on the bureau the lender goes to for this score. Suppose you want to borrow $200,000 in the form of a fixed rate thirty-year mortgage. If your good credit score is in the highest category, 760-850, a lender might charge you 3.307 percent interest for the loan. This means a monthly payment of $877. If, however, your score is in a lower range, 620-639 for example, lenders might charge you 4.869 percent that would result in a $1,061 monthly payment. Although quite respectable, the lower score would cost you $184 a month more for your mortgage. Over the life of the loan, you would be paying $66,343 more than if you had the good credit score. Try to imagine what you could do with an extra $184 per month.

Related Source: How to Establish Good Credit History