So why does a consumer have to worry about their credit score? Is that little 3 digit code that is forever attached to each of us truly critical? Our credit score seen by our bank loan officer when we apply for a car loan matters that much? Is it really that important?
Well the answer to the question two, three, and four above is.....yes....definitely YES! Our credit score is not life threatening but it is very, very critical to our quality of life. In fact, it has been said that more marriages are broken up due to financial reasons than any other single cause. Financial reasons seem critical to me. So the number one reason a consumer credit score matters is- The Money You Borrow.
The money you borrow is the answer to question #1 above.
Essentially the higher the credit score, the lower the rate. The lower the credit score, the higher the rate. Seems simple enough. That little 3 digit code was designed to let the lender know what type of risk the borrower presents to the lender. In other words, whom is going to pay and whom won't. Let's say someone has a 720 credit score and applies for a mortgage. That's a great score (A+) so they will probably be awarded with the best rate. Say 4.875% fixed for 30 years. Good job!
Someone else applies but only has a 680 credit score. Just two years ago, 680 was a very good score but now the rules have changed. This person may have to pay 5.125% to 5.375%. Over 30 years this could cost the second borrower thousands of dollars in extra interest. That is thousands out of the consumer's pocket and deposited into the bank's pocket.....all because of 40 points. And 40 points is easy to lose in a score if a person doesn't know all the credit scoring rule.
The problem in my opinion is that credit scores are not always the most accurate measure of quality or risk. Scores can move for non-pay history reasons.
I gave a credit scoring talk recently in Columbus, Ohio and during the question and answer portion an attendee mentioned that he had recently refinanced to a lower rate and paid off some other loans. Seems like a smart financial move doesn't it. Lower rate, a lower monthly payment, paying off some other loans.....smart, smart, smart! His reward for being financially smart? His credit score had dropped by 50 points. As far as the credit scoring system is concerned, refinancing is not a smart thing at all. This is no laughing matter for those who don't know what impacts their score in a negative way.
Many mistakenly believe that the credit score is determined by pay history. Well the credit scoring joke is on them.
Because Credit Scores are just funny that way. Yeah.......simply hilarious!