Credit scores are important to your financial health. According to March 2017 data from ValuePenguin, Americans credit scores are at an all-time high right now at 695! Way to go America. Credit score ranges reach from as high as 850 to as low as 300. What does your score mean for your potential loans and interest rates?
Now, the higher your score the better it is. If you’ve got a 500 credit score, you’ve got bad credit. If you’ve got a 700 credit score, you’ve got good credit.
Credit scores are easy to forget about until you really need one for something like getting a mortgage or a new car. Then credit scores are used to determine how much of a loan you’re eligible for, and what the interest rate on it will be. Those with lower scores are eligible for fewer loans with higher interest rates.
Lenders see low credit score holders as people who will struggle to pay their debt back. Above all else, lenders want their money back, and they use credit scores to determine who is reliable enough to pay them back.
What if you’re solidly in the middle? How does that affect your chances of getting a mortgage or a competitive interest rate on a loan?
Let’s say that you have a 637 credit score. This kind of score is definitely out of the bad range, but not quite into the good range.
If you want to buy a house with this score you shouldn’t have a hard time finding a lender. The type of loan you qualify for is a different story. With a 637 credit score, many mortgage lenders will tell you that you are not eligible for a conventional loan, which could prevent you from getting the best lending terms.
According to 2016 data from Bankrate, most people looking to finance a new car had a credit score of 714. That means your 637 credit score is lower than the average, and you can expect a higher interest rate on any auto loan you get.
Again, a 637 credit score isn’t exactly bad credit. It’s just not good credit. So if you have a score in that range, you can expect higher interest rates and fairly limited loan options. Sadly, you can’t erase bad credit instantly, but you can improve it in just a few months.
If you seek new credit (whether it’s a mortgage or another type of credit) and you don’t like the terms, try and raise your credit score over a few months. Boosting your score to even 680 will help your odds of getting a good line of credit tremendously.
Having a good credit score will help you save money and will help you build a more stable financial future. It’s helpful in the here and now, and in the future. If possible, take the year before you want to make a major purchase like a house to try and get your score as high as possible. Higher scores will always receive better loan terms, and you want the best when it comes to your money.
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Kara Perez is the original founder of From Frugal To Free. She is a money expert, speaker and founder of Bravely Go, a feminist financial education company. Her work has been featured on NPR, Business Insider, Forbes, and Elite Daily.