Credit scoring provides a snapshot of how you're doing financially. Your scores affect everything from job searches to insurance premiums to mortgage rates. So why would you want to fly blind?
Let's say you're buying your first home, and need a mortgage of $175,000. Mortgage lenders approve home loans according to perceived credit risk; the lower your credit scores, the higher your mortgage rate, discount points and lender fees will be.
Credit Scores Down the Drain, Finance Charges Through the Roof
In this example, your three credit scores range from 677 to 683. According to FICO, the company that developed the credit scoring model used by the three major credit reporting bureaus, in January of 2014, your 677 credit score would likely get you a monthly P & I payment of $921.00 based on a mortgage rate of 4.829 percent.
With a minimum credit score of 680, your monthly P & I payment would be approximately $899 per month with a mortgage rate of 4.615 percent. So what's the big deal? Saving or spending an extra $22.00 per month won't make or break your budget.
But wait! With a credit score of 677, you could pay as much as $156,644 in interest over the full 30 year repayment term. Compare that to the calculation for a minimum credit score of 680. Interest paid over the 30 year repayment term would be approximately $148,531. Raising your credit scores by three points to 680 could potentially save $,8113 over the full 30 year loan term. These calculations are based on national average mortgage rates provided by FICO daily.
Although mortgage rates change constantly and could offset savings estimates based only on your FICO scores, the example demonstrates how lower credit scores can cost you even when they fall by a few points.
Knowing Your Credit Scores Saves Time and Money
If there are two things we are short of today, it's time and money. Knowing your credit scores in advance of shopping for a home, vehicle or credit card can help you target a range of affordable financing options based on your scores. Knowing your credit standing and affordable price range before shopping can help you avoid being turned down for a mortgage or car loan.
Knowing your credit scores helps you negotiate better deals because you can't be talked into accepting a less favorable offer than you deserve.
Find Identity Thieves and Flat-Out Mistakes
You can request a free copy of your credit reports from each of the major credit agencies once a year; your credit scores are also available for a nominal fee. Reviewing your credit reports and scores can help you:
- Identify unauthorized use of existing credit accounts or unauthorized accounts opened in your name.
- Detect identity theft through reported addresses you don't recognize, accounts you didn't open and unfortunately, if your credit scores take a sudden dive due to non-payment of accounts you didn't open or use.
- Find credit reporting errors; if you're confused with a deadbeat who shares your name, your credit scores could crash as his or her dastardly deeds appear on your credit profile. Most mistakes are minor, but finding them usually requires a detailed review of your credit reports.
Improve Your Credit by the Numbers
Last but not least, knowing your credit scores provides a baseline reading for improving your credit. You'll be encouraged by seeing your credit scores rise as you pay off debt and put your finances in order.