I thought I understood the importance of a checking my credit score and credit report until I decided to apply for a mortgage. I knew that I was up there, in the 780s-760s, but I never knew quite what that meant. When I applied, I wasn’t offered the best interest rate, and I asked why since I was sure that I had excellent credit.
I went online to find my credit score at myfico.com. “Your score is a 699.” What?! I exclaimed. But three months ago it was a 780! I went back home, frantically looking for the copy of my credit report from months back and thinking about what had gone wrong. I went to annualcreditreport.com to review my credit report and then I found the culprit! One card that I thought was paid off had a measly balance of $15. I forgot to pay it for one month and it went to $40 because of a $35 late fee. Those $40 cost me 81 points. 81! Those 81 points cost me .05 percentage points on a mortgage, which would cost me over $120,000 for the life of the loan that I would have to pay for in interest. Take a look again: $40 cost me 81 points and $120,000.
What Credit Means to Consumers and Lenders
Credit is your trustworthiness. It implies that you are worthy to pay back a balance. Those that are deemed more liable to NOT pay have to pay back more in interest. This means that they have to pay more money to borrow money since all interest is is money that you pay to borrow money. Silly concept, but borrowing money makes this world go ’round.
Why Credit is Important
So you might think “Wow! why borrow anything? I’ll pay outright”…but most of us can’t buy a car or a house outright and must become slaves to a car payment or mortgage. Those that never use credit have a lower credit score or no credit at all. One of the factors in a credit score is length of credit. So, the longer you have GOOD credit, the lower your fees will be and the lower interest you will pay. I had to counsel a client who had never had credit. Never used a credit card, never took out a loan, paid outright for everything. She was in to buy a house and she was offered a terrible mortgage with a high interest rate. I had to tell her that while I knew she was trustworthy, to the creditors she had no reputation and there was no guide for how to categorize her. The banks were simply playing it “safe.” They loaned to subprime people all they wanted to prior to 2008, but they are “scared” to lend to someone with no credit that is great with their money, only because they don’t know what they can and cannot charge her. Terrible.
Nurture Your Credit Score, Understand Your Credit Report
Credit measures how trustworthy you are in this financial world; it is a necessary evil. Therefore, pull your credit report on annualcreditreport.com for free 3 times per year and buy your credit score at least twice per year (new financial legislation might make your credit score available for free, but we won’t know this until 2011). Love and nurture your credit score because it defines you ON PAPER and can save you a lot of money.