Why Are Credit Scores Important?
Know Your Credit Part 3: One of the most frustrating things that I encountered while trying to understand my credit score was attempting to piece together all the scattered information on the subject. It is impossible to go to one place and get all the information you need, caveats and side notes included. The confusion led me to some poor financial decisions. Being that I do not want you to face the same difficulties I will create a string of blog post, that if followed in order will give you a complete understanding of credit scores in snack sized bits. All so you can digest it without being overwhelmed. At the end you will be the expert and run me out of town.
Ever wonder what all the fuzz is about when it comes to credit scores? Some people talk about them like they need to be included in the basic needs for survival: Food, Air, Shelter and a Solid Credit Score. Other people will tell you that credit scores are useless. In fact, they are evil, because credit means debt, debt means poverty for life! I wish I was exaggerating but just recently my mother told me that one of her friends asked her “should my daughter get a credit card? She actually doesn’t have a bank account because someone told her it’s bad and having a credit card is even worse.” I was beside myself. I could not believe that in the age of information people are walking around with these misconceptions. It is even more frightening to see how quickly these myths spread.
It is okay if you have any of these misconceptions. That’s why I have created this string of blogs. But I have a question for you. What do you think you need to do to survive every day capitalism? Do you think that it is possible to survive, thrive or live comfortably in a place like the USA while being ignorant about money? Please say no. Thanks. ;) Look, in order for you to succeed in this environment you must understand money, money, money. That doesn’t only include the cash you have in your wallet. That also includes debt, investing and CREDIT. Everything around you is driven by these forces and refusal to participate or ignorance on these matters is a recipe for disaster.
Think, how do people buy a home? How many people buy their homes cash? How do people buy a car? Do most people buy them cash? How do people start a business? If there are any major expenses do people pay them cash?How are people able to get the cash to make major purchases in their lives? Answer: Credit Scores. Without it you are a fish out of water in this environment.
But credit scores go beyond borrowing money. They affect everything. Including your car insurance! You read that right, in most states, if you have a poor credit score your car insurance will be higher than someone who has a good credit score. The differences can be dramatic! Some people can be paying hundreds if not thousands more in car insurance due to a low credit score. What if you want to lease an apartment or home? Now it is becoming common place for landlords to check your credit score in order to decide whether or not to rent to you!
A poor credit score has far reaching impacts. My favorite credit story is one that my friend told me. He worked as a sales guy for solar panels. Everyday he walked from door to door and sold them. Here was the deal, the solar panels themselves were FREE but you paid a solar energy bill. The monthly charge was LESS than what the electric company would charge. After 10 years the solar panels would become yours and you no longer had to pay any monthly electric bill. After hearing of the deal, many people were ready to sign up.
You are talking about a lower electric bill AND free solar panels after 10 years! Well there was one small problem with a great number of those customers. They had poor credit scores. The solar panel company saw that as a risk so the customers lost the deal and a chance to save a few hundred dollars hundred dollars every year. That might not seem like a big loss, but what about losing HUNDREDS of THOUSANDS of dollars?
How is that possible you say? Well let’s take buying a home as an example. This is the largest purchase most people will ever make in their lives. Well, when ever you’ re getting a loan you have to deal with possible fees, as well as a contract that sets the terms and conditions: Life of the loan, payments, down payments, and interest rate. Having a solid credit score will help you get leverage on all these things. Maybe you wouldn’t have to pay the bullshit “application fee,” “filling fee,” or “Nonsense fee.”
How about the life of the loan? Do you want 10, 15, 20, or 30 years? You decided instead of the bank deciding for you. How about a down payment? How much will they require you to give? 5, 10, 15, 20, 30, 40, 50 percent? If you are buying a home in New York City a 50% down payment can be $500,000! Would you ever be able to afford a home with such a huge down payment? Here is the big one, the INTEREST RATE. A “few points” difference in APR (Annual Percentage Rate) is huge! Hundreds of thousands of dollars huge.
For example, say you have a $500,000 mortgage and you are paying a fixed APR of 4.5%. At the end of that loan you would have paid $412,033 in INTEREST alone. I know, it seems like a lot, but actually a 4.5% APR is pretty good. Now let’s take the same mortgage but with an 8.5% interest rate. At the end of that loan you would have paid $884,044 in interest ALONE!
This is a link to an interest calculator — https://www.bankrate.com/calculators/mortgages/loan-calculator.aspx
I know, it’s absurd. It’s scary. Imagine what you could do over the course of 30 years if you are able to save the $400,000 difference. How would that change your life?
Here is the fact: a good credit score will save you thousands on that auto loan, personal loan, business loan, bills, interest etc. Over the course of your life you will save literal hundreds of thousands. That’s why your credit score is important.
Here is a list of things your credit affects:
Home Owners Insurance
Renters Insurance
Life Insurance
Cell Phone Bills
Ability To Get A Phone On a Payment Plan
Utility Deposits e.g. Electric, Water, Gas Companies
What other bills are affected by your score? Tell me in the comment section.
