Understanding How Your Credit Score Impacts Your Life

Have you been told time and time again that you did not qualify for that car, home, or department store credit you are trying to obtain? Are you tired of the humiliation you feel every time you hear the words “Sorry, your application has been denied because your credit score is too low”?

Your credit score can save you money or cost you money, sometimes a lot of money. Yet, most people have no idea what their score is, how it is computed or how to make it better.

A credit score is a three-digit number that lenders utilize to determine the risk associated with lending individuals money. Credit scores range from approximately 300 to 850. The higher your score, the easier it is to obtain credit. The lower your score, the more risky lenders view you.

Scores of 700 and above are considered excellent or A credit. Scores of less than 640 are generally considered to be sub-prime. Borrowers with sub-prime credit scores usually have a much more difficult time obtaining credit and pay a much higher interest rate for credit if they do.

A loan will reflect the risk associated with your credit score. For example, Borrower A has a credit score of 750. Borrower A went to a traditional bank and obtained a ten year loan of $5,075 at 18% per year. Borrower B has a credit score of 575 and a traditional bank denied their loan because of poor credit. Now, they would have to seek out a different lender who would give them the same ten year loan of $5,075 but at 59% per year.

How does each loan compare? Borrower A would be making a monthly payment of $91.44 for ten years; $10,972.80 total payments made within that span and having had paid $5,897.80 in interest. Borrower B on the other hand would be making $250.31 monthly payments for ten years; $30,037.20 total payments made within the same span and having had paid $24,962.20 in interest. Big difference!

Because of their poor credit score, Borrower B paid $19,064.40 more in interest than Borrower A. If Borrower B had a higher credit score and was willing to pay $250.31 per month at 18%, they could have borrowed over $13,000. Borrower B would have had an additional $7,925 to spend as they pleased.

Educating yourself on your credit score is the key to your purchasing power. If your score is not great, remember, it is NEVER too late to repair your credit score.


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