Credit Score - Why it is important
I was reading through the ways to save money thread, and thought about how we missed out credit scores and credit reports!
Credit scores and reports are such a big part of our lives, and I strongly believe that learning about it, and knowing how to manage your credit score is going to help us save a tonne of money in our lifetime!
So, I am starting this thread to talk about credit scores.
First, what is a credit score?
A credit score is mathematically calculated by all the information found in your credit report, and translated into a 3-digit number between 300 to 900, and lenders use this number to gauge your credit history.
An average credit score is around 650, and a score of 520 is generally required to qualify for a mortgage.
Why is credit score important?
Think of the credit score as a report card on how you are doing financially in your life. J
All lenders based their decision on whether to extend credit to you on your credit score. All lenders, from your bank, to your car dealership, to your department stores credit application to your landlord, they all rely on credit scores to help them access whether you as a credit applicant will be reliable in making your payments, and if it is worthwhile for them to take on the risk of lending you money.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /><o:p> </o:p>
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<o:p></o:p>And most importantly, the higher your credit score, the better chance of you negotiating for the best rates you can get from a lender. I think this is where you will find that you will get the most savings over the course of your lifetime financial activities.
Consider this simple example:
For a $100,000 mortgage at 5% interest rate, paid over 25 years, you will be paying $75,377.01 in total interest to the lender over a span of 25 years.
For a $100,000 mortgage at 3.25% interest rate, paid over 25 years, you will be paying $46,194.87 in total interest to the lender over a span of 25 years.
That’s a savings of $29,182.14 over 25 years, which translates to $1,167 a year!
I’m not sure if you think that is much, but for me, I’d much prefer to have that $1,167 in my own pocket, than in the pockets of my lenders!
So, hopefully, I have managed to convince you that your credit score and report is a very important financial tool that you should learn to manage. J
I will write about ways to improve our financial report card in a future post.<o:p></o:p>
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