Do you know your credit score? Credit affects more aspects of your financial life than you may realize -- the ability to buy a home or car, get a credit card, rent an apartment, or even get a job can be affected by your credit score. To help you better understand the importance of credit scores, Odysseas Papadimitriou, CEO and Founder of personal finance website WalletHub shared five important reasons why you should know yours.
Better interest rates on loans
The most obvious reason it's important to know your credit score is because your score determines your ability to qualify for loans and to get better interest rates when borrowing.
If you know your credit score, a little research can let you know how much you should pay in interest on a loan before you apply. For example, according to recent data, a consumer with a credit score of 720 can expect an interest rate of around 3.56% on a $250,000 30-year mortgage. So if you know your score is a 720 and a bank offers you a rate of 4%, you'll know to keep looking.
I realize that the difference between a 3.56% and 4% mortgage rate may sound trivial, but the higher rate translates to more than $22,600 in additional interest over the life of the loan. That's why knowing your score before you apply for a loan is so important.
The best credit card rewards
According to Papadimitriou, the most compelling credit card-related reason to know your credit score isn't necessarily about getting a lower interest rate. After all, even the best credit cards tend to have significantly higher interest rates than other forms of debt, and many cards offered to consumers with just "ok" credit scores have 0% APR introductory periods.
The big difference is the level of rewards you can expect to receive, which has the net effect of a lower interest rate.
Some of the rewards programs can be pretty lucrative -- for example, my personal go-to credit card is the Capital One Venture Rewards card. The card has one of the best rewards rates in the business -- two miles per dollar on all purchases, which is effectively 2% back toward travel. Plus, the introductory bonus of 40,000 miles is worth $400, more than enough to offset the $59 annual fee for several years. However, the card is only available to consumers with "excellent" credit, according to Capital One.
It could help you get a job
Now, not all employers check your credit, and those that do see only your credit report, not your score. However, a low score can be an important indicator that you may be in trouble. "Your credit score reflects the quality of your credit report," says Papadimitriou. "A low credit score doesn't necessarily mean that something is wrong, but it does mean that you should check your credit report before applying for a job."
Papadimitriou also points out that younger job-seekers may have lower credit scores due to a lack of experience using credit, not because of irresponsible use. However, if two qualified individuals apply for a job -- one with a long, stellar credit history, and another who got their first credit card two months ago -- it could make a difference in the hiring decision.
You'll understand how scores move
Credit scores change often, and it's important to know your score on an ongoing basis, not just a snapshot. As Papadimitriou says, "actively monitoring your credit can help you understand how scores move."
This is particularly important because many people don't understand just how much of an impact certain events can have on your credit score. As a personal example, when my wife and I bought our house, we financed nearly $8,000 worth of furniture with a "60 months no interest" deal from a local furniture store. For scoring purposes, this looks like a maxed-out credit card, and immediately dropped my score by more than 50 points -- much more than I had expected.
Keep in mind that an impact like this is temporary. As you establish a good payment history with the account and the balance begins to drop, those points will come back. However, the knowledge of how something like this can affect your score can be valuable. If I had needed to apply for a car loan, I could have run into serious trouble after that 50-point drop, so being able to anticipate things like this can help you time your transactions better.
Your score affects your car insurance premium -- more than you think
It's common knowledge that a better score can get you a lower interest rate on a mortgage or auto loan (although many people might not realize that it could mean tens of thousands in savings). However, many people don't realize just how much their car insurance premiums depend on their credit score.
According to a WalletHub study, there is a 49% difference in the cost of car insurance premiums between a person with excellent credit and one with no credit history. And, the difference can be even bigger in certain areas. For instance, premiums fluctuate by 115% in Michigan depending on credit history. In other words, people with no credit are paying more than double what customers with excellent credit pay for the same exact insurance.
To be fair, the difference between a good credit score and an excellent score won't result in quite as big of a difference. However, if you monitor your credit, you might be surprised at how much your premiums drop as your score goes up.
The bottom line here is that your credit score plays more of a role in your financial life than you might think, so it's important not to be in the dark. Knowing your score is the first step toward improving it, so if you have no clue what your credit score is, it would be a good idea to find out.