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Your Credit Score and Borrowing Money

For the first entry in Friday’s Financial Fitness series, we thought it would be appropriate to discuss how your credit score impacts your borrowing opportunities.  You hear everyone talking about the importance of raising your credit score to “improve your credit.”  But what does this improved credit bring?  Which specific advantages will you have by doing so?  Bottom line: why should you be motivated to raise your credit score?  Let’s take an in depth look at an important advantage you will have-why raising your credit score increases the amount of opportunities you will have to borrow in the future.

First, it is important to review what your credit score represents.  Your credit score is basically a snapshot that assesses your financial stability.  It tells a story of how much outstanding debt you have, how much debt you have already paid off, as well as the likelihood that you will pay your bills on time in the future.  Ranging from 300 to 800, the higher your credit score, the better.

Raising your credit score puts you in healthier financial standing, which in turn makes it easier to borrow.  How does this work?  Let’s say you are looking to buy a house.  You have a plan-you have been looking at houses and you’re ready to take the plunge.  After assessing the amount of money you have in the bank to pay your down payment and your future mortgage, you realize that in order to make your dream of owning a house a reality, you need a loan.  When you meet with a potential lender, they will be basing their decision about whether or not to grant you a loan on the amount of risk you present.  Banks need to have a certain level of confidence that you are going to be able to pay back this loan over time, which comes in the form of your monthly mortgage payment.

So where can they look to determine the risk they’re taking?  Banks go straight to your credit report.  They want to see how much debt you have and how on-time you are with other payments.  Since they may know nothing about you prior to your loan appointment, this is a sure-fire way for them to assess your financial situation.  With good credit, you will increase your chances of getting that loan approved in the first place.  Also, once your loan is approved, having good credit will lower the interest rate the bank charges you each month.  Over the life of a 15 to 30 year mortgage, a lower interest rate can save you thousands and thousands of dollars!  If you have what the bank considers bad credit, they may not approve the loan in the first place, as they may feel that your payment history is not reliable.  If they do approve your loan, despite your bad credit, your interest rate will certainly be higher.  Furthermore, the initial down payment on your dream house will be higher because of your low credit score.

So the next time you hear someone mention the importance of raising your credit score, know that doing so will not only give you peace of mind; it will also increase the amount of opportunities you have to borrow money in the future-at a lower interest rate!

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Category: Credit, Credit Reports

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One Response

  1. [...] your debt at a faster rate, you will also be well on your way to improving your credit score; improving your credit score impacts your borrowing opportunities.  Below, we outline 5 more ways to save money on a daily [...]

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