You may not give much importance to your credit score but others are looking at it at crucial points in your life and a low credit score will cost you!
In order to understand the importance of a credit score, let’s start at the beginning.
What is a credit score and how is it used?
A credit score is the number calculated using your credit history (credit report) and is used every time you go out to get a loan of any kind. It is also used for various other purposes. A credit score is calculated using the various information available on your credit report such as your payment history, types of credit used, amount owed, and new credit applied. For complete details see how is credit score calculated.
Credit score is essentially a measure of your creditworthiness and indicates the level of risk an institution is taking when they lend money to you. The most commonly referred to Credit Score is issued by FICO can vary from 300 to 850. The higher your score the easier it is for you to get a loan and possibly at a lower rate of interest. Since a credit score is a measure of how well you have managed to pay back the credit you have drawn on, it is also used by many as a way to see if you are a responsible person or not.
A low credit score will not just hurt your chances of getting a loan; it may also affect your career. These are some things which will cost you more with a low credit score.
Lenders will charge a higher rate for personal loans: It will not be easy to find a lender if you credit score is low. And even if you are successful at finding a willing lender, they will likely charge you a higher rate of interest. So a loan can be an expensive proposition if you have not worked to improve your credit score.
Car and apartment can cost more: You will get a higher APR on car loans and mortgages if you have a lower credit score. Lenders demand a higher rate of interest as they view people with lower credit scores as higher risk and want additional interest to make up for the risk.
Insurance premium will be higher: An auto insurance policy will likely come with higher premiums than if you had a good credit score. Auto insurance companies view people with lower credit score as more likely to file for claims or as people may default on insurance premium payments.
Utilities may also be affected: Service providers are cautious of poor credit scores. They would like to be assured of timely payments and will charge a hefty deposit to offset any default. So with a poor credit score or no credit history, you are looking at paying a hefty deposit to get the service. Landlords are wary of tenants who cannot pay their rents on time; they may charge a larger deposit in case they are not happy with your credit score or simply ignore your application.
Your career may also depend on your credit score: Your employer and prospective employers may check your credit history. This may generally happen when you are applying for a new job. Having a bad credit score may be viewed as your inability to manage your finances well and may indicate potential poor performance at the job. You may lose out on career opportunities because of a poor credit score.
What can you do?
Evaluate your credit report periodically to detect any dues, errors on the report and be sure to make your payments on time. You can request your free credit card report from the official website once every year to ensure that the details on the credit report are accurate.