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You vaguely understand the concept of credit scores. You know that you have a score between 300 to 850 sitting on your credit report. For example, you know that your financial habits can impact the score, making it move higher up on the scale or dropping it closer to the very bottom. And you know that when a financial institution runs a credit check on you, they can get a good look at your report and the score listed on top of it.
What you don’t know is why you should care about your credit score. It’s just a number, right? Not exactly. Your credit score can have a lot of influence on your finances.
Interest Rates
Your credit score can influence the interest rates on your loans. If you have what’s considered a bad credit score, then a lender is more likely to offer you a loan with a high interest rate. A good credit score is likely to land you with a lower interest rate in comparison.
Why? A credit score is supposed to determine your creditworthiness (essentially, how responsible you are at handling credit accounts). A low score often means that you have been irresponsible or inefficient with your credit accounts — you’ve made frequent late payments, you’ve defaulted on payments and you’ve potentially gone into debt collection. New lenders will see this as evidence that you are a risky borrower. To mitigate the risk of letting your borrow funds, they will give you a higher interest rate.
A higher interest rate is supposed to discourage you from borrowing beyond what you can afford to repay. It also incentivizes you to take your repayment plans seriously and tackle your outstanding bills on time. If you don’t, the higher interest rate will quickly inflate those bill payments, forcing you to pay back more.
Loan Acceptance
In some cases, your credit score can determine whether you will be accepted for a loan or not. If the lender considers the score to be too low, they will automatically reject your application and ask that you only reapply once you’ve managed to bring your score up to the desired threshold.
This can be a problem when you really need to borrow funds — like in an emergency. One of the biggest benefits of online loans is that they are convenient for emergency expenses. The online loan application process is fast and will reveal your approval (or rejection) in a short amount of time. If your application gets approved, you can access your temporary funds to pay off your emergency expense very quickly. If your credit score is subprime, you may not be able to turn to this solution in a crisis.
That said, for payday loans for bad credit, you may want to understand the pros and cons before diving in. For example, many people understand that payday loans have high interest rates. These individuals also think they will payoff the balance in full in 2 weeks, but it may be much more difficult to do that, which may result in financial hardship.
This is also a problem when you want to make some big lifestyle changes, like buying a house or opening a new business. These changes often require substantial loans that require higher credit scores. For instance, when it comes to applying for a mortgage, you should at least have a score of 620 on your credit report.
Loan Balances
Your credit score can impact the amount of credit you’ll be offered by a provider. If you have a good score, they might offer you a large credit limit. If you have a bad credit score, your balances will be more limiting. You will likely be offered a smaller amount.
The good news is that with certain borrowing options, like credit cards and personal lines of credit, your provider can offer to increase your limit after you’ve proven that you can handle repayments responsibly. So, your lower balance doesn’t have to be forever.
Your credit score is more than a number sitting on your credit report. It’s a rating that can influence the state of your finances now and in the future. So, make sure that your score is helping your finances — not hindering them.
