How credit scores can impact your future

Every person interested in personal finance should know what a credit score is. It is a factor of great influence for obtaining financing, loans or other modalities of installment purchases available in the market.

The detail is that not everyone really understands how the score works, despite having heard about it at some point.

This happens, in general, because the score is composed of several factors, which may vary periodically due to the influence of changes in consumer behavior.

By the credit score table, consumers are classified into three groups according to their score:

• from 0 to 300 points: consumers who are at high risk of default over the next 12 months;
• from 301 to 700 points: those with an average risk of default over the next 12 months;
• from 701 to 1000 points: low risk of default over the next 12 months — and therefore easier to obtain credit.

Suppose you want to borrow $200,000 in the form of a fixed rate thirty-year mortgage. If your credit score is in the highest category, 760-850, a lender might charge you 3.307 percent interest for the loan. This means a monthly payment of $877. If, however, your credit score is in a lower range, 620-639 for example, lenders might charge you 4.869 percent that would result in a $1,061 monthly payment. Although quite respectable, the lower credit score would cost you $184 a month more for your mortgage. Over the life of the loan, you would be paying $66,343 more than if you had the best credit score. Think about what you could do with that extra $184 per month.

It’s no secret that bad credit can affect your entire life. It can make it impossible or much more expensive to get funding or even sign up for necessary services, such as electricity. Poor credit can mean a lack of access to non-necessities, such as cable, or make those services more expensive or more difficult to get.

Bad credit can also impact other areas of your life. It could limit your relationships, for example. Some romantic partners don’t want to become involved with someone who can’t manage money.

With knowledge of what a credit score is and the criteria for its formation, it is possible to adopt an efficient strategy to gradually increase the score, thus ensuring better conditions and rates.

Good credit management leads to higher credit scores, which in turn lowers your cost to borrow. Living within your means, using debt wisely and paying all bills—including credit card minimum payments—on time, every time are smart financial moves. They help improve your credit score, reduce the amount you pay for the money you borrow and put more money in your pocket to save and invest.