Why is a Credit Score Important?

What Are Credit Scores Used For?

FICO created a score range of 850 to 350. Lenders, landlords, and insurance companies rely on credit scores to determine the likelihood that a consumer will repay a debt responsibly or whether they will be a low risk as a tenant or insured.

FICO established five risk Categories:

  • 780-850 Low Risk
  • 740-780 Med/Low Risk
  • 690-740 Medium Risk
  • 620-690 Medium/High Risk
  • 620 and below High Risk, sub prime

A high score, or low-risk category gets better rates for mortgages, auto loans, and credit cards. They also are more likely to be selected as a renter, and may see lower insurance rates. A high credit score (740+) is an indicator that a consumer has done well managing debt and they will be offered loans for lower interest and less money down. Lower credit scores (below 620) indicate that a consumer may not be able to repay the loan, so lenders charge a higher rate of interest and require a larger down payment to consumers with low credit scores.

Consumers with a credit score higher than 740 will get the best interest rate. Having a credit score below 620 will cost hundreds of dollars more in interest and insurance. A credit score of 620 and lower will have an interest rate that’s up to half of a percent higher. To put that in number terms, this chart shows the difference in cost for a fixed rate mortgage over a 30-year term. The consumer with the lower credit score will pay $33,643 more than the consumer with the higher score over that 30-year period.

Fixed Rate, 30-Year Mortgage
Credit ScoreLoan AmountInterest RateTermsTotal Interest Charged
740 & above $360,000 2.31% 30-Year $139,566
620 & below $360,000 2.81% 30-Year $173,208

A loan for a new car can be a whole percent higher for a borrower with a credit score lower than 660. A three-year loan for $30,000 can cost an extra $482 in interest.

Three Year Auto Loan
Credit ScoreLoan AmountInterest RateTermsTotal Interest Charged
740 & above $30,000 3.74% 36 months $1,761
620 & below $30,000 4.74% 36 months $2,243

Auto Insurance Scores

Similar to lender, insurance companies also use a driver’s credit score to determine an insurance rate. The insurance rate is “used to estimate how likely drivers are to file a claim.” If a driver has a low insurance score (which is directly correlated with a low credit score), they will likely pay a higher premium. In order to improve your insurance score, you have to work on improving your credit score. We will address specific ways to improve your credit in the How to Improve a Credit Score blog article.

Potential Employers May Look at Your Credit Report

“The National Association of Professional Background Screeners worked with on a nationwide survey of 1,528 human resources professionals about screening checks. The results showed 25% of the HR professionals use credit or financial checks while hiring for some positions, while 6% check the credit of all applicants.”

If you apply for a job at a bank or other company that deals with sensitive information, part of the hiring process may require a review of your credit report. Employers use your credit history to check for indicators that will help to determine if you are a good candidate and a good risk if they hire you. Potential employers must give you notice of their intent to review your credit report and you have the right to refuse. You also have the right to respond and explain the red flags on your report.

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