If you live in the United States you are certainly familiar with the concept of a credit score, in fact you may already know your own personal score. But what does it mean to have a credit score of 515 vs 750 to your life? The short answer is, a great deal. Your credit score not only determines the amount and type of credit available to you, it also has an impact on the interest rate. How important is the interest rate you pay?
Let’s take a look at an example. Person A has a poor credit score of 545, he decides to buy a car for $10,000 and is offered an interest rate of 15%. To keep our example simple we’ll call this $1,500 worth of interest in the first year. This means that he pays $125/month in interest alone, OUCH! Person B on the other hand has excellent credit, he’s always paid his bills on time and has a good job. He is offered the same car for 5% interest. Person B in our example is paying $500/yr in interest, which is only about $42/month.
This means Person B is $83/month richer than Person A, simply because he has a better credit score! It is very important to keep up on all of your bills and make all of your payments on time. If you have good payment history, a low debt to income ratio and don’t have an excessive amount of debt available to you, you will be considered a good credit risk. If you are a good credit risk you will be offered lower interest payments and save money. It’s as simple as that.