Why your credit score is so important

Your credit score, or FICO score, doesn’t just determine whether or not you will get approved for a new credit card. Most importantly, your credit score determines what interest rates you will pay for every penny you borrow, whether it’s a car loan, credit card, or mortgage. Think your credit score doesn’t matter? Think again.

Your credit score tells lenders how likely they are to earn a return on their investment of lending money to you. The higher your score, the safer a bet you are for the lender, and the lower interest rate you’ll get. The lower your score, the more wary lenders are of giving you money, and the higher the interest rate they will charge you.

To give you an example of how this works, let’s take a look at an example of 30-year fixed mortgage rates. For the most qualified borrowers with a FICO score of above 720, the interest rate is 5.845%. In the middle of the road, somebody with a credit score of between 620-674, the rate is 7.658%.

At the bottom, those with credit scores of under 560, could pay 12.985% (assuming they can get a mortgage, which is highly unlikely these days). The difference between interest payments made by the well qualified borrower and the unqualified borrower, over 30 years? More than a half a million dollars.

If that’s not a reason to get your credit score in shape, what is? If you’re curious, you can get your free credit report and score.