How Your Credit Score Impacts Your Financing

February 25th, 2014 by Alex Bach


Written by Alex Bach

Other than a very small percentage of the world’s population, we live in a world where if you want a house, a car, an education–heck, even a couch or a TV in some cases–you have to take out a loan.  And these loans you have to take out have interests rates associated with their repayment.

Your credit score is going to be the determining factor in just how much interest you’ll have to repay–and even if you’ll be allowed the loan in the first place.

Not sure what your credit score is or how to order one?  Everyone is entitled to one free credit report per year.  Here’s how to order your free credit report.

The FICO Score

Your FICO score is the great indicator of your credit worthiness.

The score is assembled based around a set of parameters created by the Fair Isaac Corporation and is calculated by the big three reporting bureaus: TransUnion, Experian, and Equifax.  Though the score will vary slightly from bureau to bureau, this score is the key to all your financial dealings.

Interpreting Your Score

Businesses use a customer’s FICO score to determine just how reliable he or she is to repay a debt.  A high score indicates that you have a higher degree of credit worthiness.  A low score, naturally, indicates a lower.

What Does it Mean?

As you can imagine, lower degrees of credit worthiness tend to make lenders a bit nervous.  Therefore, in order to account for that nervousness, or to reward themselves on issuing a risky loan,  the lenders will increase the interest rate on the loan. This means that, over time, a person with a lower credit score and higher interest rate will eventually pay more money for the same object than a person with a higher credit score.

People with higher credit scores usually find themselves making lower monthly payments, which can then translate to more money to put towards other payments, or to making payments on time–both things that will help increase your credit score.

Good Credit Scores Aren’t Just Reserved For the Rich

Despite the circular way that last bit might sound–higher credit producing higher credit–good credit isn’t just something available to the rich.  Your credit score is comprised of your credit history: not how much you borrow, but how you pay it back.

Paying your bills on time and keeping a responsible line of credit open is the best way to drive up your credit score. Which, as we’ve just shown, can lead to you saving more money the next time you take out a mortgage or get financing on a car.  The key to saving money–and saving yourself–is by having a good credit score.

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