How does my score affect loans?

Your credit score is the way you are identified in the financial world. You are but a number in a database to credit bureaus. Those who decide what you qualify for with credit and interest rates do not know that you a reliable person, a good worker or an upstanding individual.

All they have to go on is your chain of account activities, credit inquiries and payment history. The credit score is the best way they have to determine your risk for defaulting on a loan, or for your ability to repay your loan. This is the one-all and end-all for many companies, and it has a big effect on your life, so do not underestimate it. 

Lending institutions use your FICO score or one like it to assess what level of risk you may be. Because all of their information is based on numbers they rely on your credit account history to determine whether or not you are worth their risk.

Although this is not the only factor they take into account it is the main piece of information that every lending institution will require. It is the single most important piece of information, and the longer you have had upstanding credit the lower risk you will be. Your score is important to follow and understand so that it does not act as a deterrent when applying for credit.  

A lower score may not stop you from receiving a loan but it will certainly affect your interest rates. Typically those with scores over 700 are receiving optimal interest rates and can receive financing for mortgages, automobiles and student loans easily.

The creditors are going to protect their investment and reward those who do not post a high risk to them. This is a good example of where paying your bills on time and not carrying large balances is beneficial. 

Someone with a lower score may have a hard time receiving credit but you can be sure that if they do the financial institutions are not offering them the same low interest rates as those individuals with higher scores.

A low score could result in paying an interest rate nearly double of that of the high score. In the example of a mortgage carried out over 25 to 30 years, you would wind up paying thousands more on the same amount of money.  

It is important to know what your score is before applying for a loan. The ‘soft’ inquiry will not affect your credit score and will give you a little insight to what the financial institution will be looking at. If you have a score below 500 then this may not be the time to be applying for a mortgage.

Taking a few years to clean up your debt and improve your score could save you thousands of dollars in interest. The more recent account activities will affect your score more than those years in the past so there is always room for improvement on your score.