Many of us could go through life never knowing much about the information that lenders get when we apply for a loan. We remain plainly oblivious, even though our credit scores could cost us lots and lots of money.
You should certainly be keeping any eye on your credit if you've ever been a victim of identity theft. (Check this out for information about how to avoid identity theft.) If you've ever been denied credit, you've probably run smack into your credit score the hard way.
It's a good idea to start paying attention to your credit score if you have a big purchase, like a home or car, on the horizon. If you're thinking about refinancing your mortgage, or you hold a credit card, this score's influence is significant. But even if you don't have any big lending moves afoot, it might be wise to check in on your grades every once in a while.
That's because your credit score determines not only whether you can get a loan or a line of credit, but it also determines the interest rates that a bank or lender charges. Even the difference between excellent and merely good credit can have an impact on your bottom line.
Take these examples offered by Fair Isaac, the company that issues the leading scores used by lenders, known as the FICO score. Let's say you're hunting for a new home and applied for a 30-year mortgage of $250,000. If your credit score is above average, between 760 and the maximum 850, you could be offered that loan at 5.94% (based on national average interest rates). If your credit score ranks between 700 and 759, which means it's hovering around the national median of 723, your interest rate could rise to 6.16%.
Monthly, you'd pay $35 extra. That doesn't sound like such a big deal -- until you consider that over the life of the loan you'll fork over an extra $12,600. Think about the size of the financial hit you would take if your credit score fell to the bottom. At scores between 500 and 579, a lender would charge you 9.32% for the same 30-year mortgage.
According to Fair Isaac's examples, the differences in interest rates could be even starker if you're applying for an auto loan. With a score over 720 (over the national median), you could expect to get a 36-month car loan around 7.153%. Once your score slips just below 720, to someplace between 690 and 719, your interest rate would increase to 7.954%.
Your credit score can influence not just these installment-style loans, but also the interest rate charged by your credit cards. Start multiplying the effect of less-than-perfect credit across all your borrowing, and you'll quickly realize that a few late payments can cause a big dent in your checkbook. (Find out more about what goes into your credit score here.)
High interest rates can bleed away money that you'd rather put to work through saving and investing. Let's say you're that home shopper looking for a 30-year mortgage. If you get the best rate available, you'll have an extra $35 at your disposal each month, or an extra $420 each year. If you invested that money in an S&P 500 index fund that returns 10% annually, your $420 would have more than doubled, or turned into $1,089 in 10 years.
If you have a longer horizon for investing, you might want to check out some companies identified by Fool Tim Hanson as businesses built to last for a century or more. Mull over icons like Wal-Mart
You, too, could eventually save a few extra interest dollars to invest, even if your credit report has a few black marks. The next part of this series will look at fixing your credit score.
Our Credit Center has more information on all things relating to credit scores and credit reports. Or read through these articles to find out how to repair some of your credit mistakes:
- Your Credit Score May be Costing You Big Bucks
- Are You Wearing a "Kick Me" Sign?
- Is Your Credit Being Hacked?
Both Wal-Mart and Berkshire Hathaway are Motley Fool Inside Value recommendations. To find other companies at great prices, try a free 30-day trial today.
Fool contributor Mary Dalrymple does not own stock in any company mentioned in this article, though she wouldn't mind outlasting the companies built to run 100 years. She welcomes your feedback. The Motley Fool has a disclosure policy.