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My Money - Why do credit scores matter so much?

Q: Why do rates vary so much based on credit score?

Posted: Jun 20, 2018 2:03 PM
Updated: Jun 25, 2018 9:44 AM

Link: https://www.firstalliancecu.com/blog/why-do-credit-scores-matter-so-much

Q: We hear and see a lot of ads talking about the importance of knowing your credit score. Why do credit scores matter so much?

A: Credit scores matter a lot, especially when you’re ready to take out a loan. For example, there are minimum credit score requirements for a mortgage loan, and interest rates can vary significantly for vehicle and personal loans based on your credit score.

Q: Why do rates vary so much based on credit score?

A: Traditionally, credit scores are used as an indicator of risk. So the higher your credit score, the lower the risk that you won’t pay back the loan. On the other side, the lower your credit score, the higher the risk will be that you won’t pay back the loan. That’s why interest rates may be higher for lower credit scores - financial institutions are compensating for the potential risk to them to loan you the money.

Q: How can you improve your credit score?

A: The best way to improve your credit score is to make your payments on time every month. Another way is to keep your revolving balances, like credit cards low compared to your credit limit.

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