Everyone worries about their credit score – but does it really matter? Your credit score is just a number, a number that gets determined by your financial history. And it can seem like you have little control over how that number changes.

But your credit score is so much more than a number. And you can control it! In many ways, your credit score is the key to your financial future. 

Understanding just how much your credit score matters is critical. If you aren’t sure how your credit score works, or how it affects you, here’s the information you need.

What is a Credit Score Used For?

Your credit score is all about credit – or how much money you’re able to borrow. It’s created based on information from your credit report, or your credit history.

And your credit score shows banks and financing companies how you borrow money, how much you borrow, and whether or not you make your payments. It’s an indicator of your reliability, or how likely you are to repay money that you borrow.

And a credit score is determined by your credit report. Your credit report, which you can see, includes a bunch of financial information. It can include:

  • Past loans
  • Current loans
  • How much money you’ve borrowed, to date
  • Your required minimum payment amounts
  • Your payment history, including whether payments are on-time and meet the minimum
  • Bankruptcy
  • Foreclosure
  • Defaulted loans
  • Any bills or loans in collection

Based on these details in your financial history, your credit score is generated. And your credit score is then used by lenders to determine whether or not you’re a financial risk. 

Credit scores determine rates, costs, and loan details. Your score affects your insurance coverage and premiums, loans and their interest rates, utilities, renting, and significant purchases like cars and houses.

The Benefits of a Good Credit Score

A good credit score can help you enjoy a solid – and low-cost – financial future. Having a good credit score can save you money, help you qualify for loans more easily, and even determine what you’re able to purchase.

Here are some of the biggest benefits of having a great credit score.

Lower Interest Rates

When you borrow money, either on a credit card or loan, a higher credit score often means a lower interest rate. The interest rate is directly tied to your credit score. So, you’ll be able to qualify for credit cards with lower interest rates, pay lower interest over the lifetime of a loan, and rack up fewer expenses.

Increased Financing Approval

If you have a good credit score, it’s a lot easier to get approved for financing. Any time you want to borrow money, a higher credit score gives you higher odds of approval. A good credit score increases your odds of being approved for new lines of credit, like a credit card, auto loan, or even mortgage.

More Negotiating Power

When you have good credit, you’re in a stronger position to negotiate the details of any new line of credit. You can pick and choose from different offers – and lenders know that. So, you’re able to negotiate lower interest rates, ask for a more attractive offer, or discuss different loan terms because lenders know you have many options.

A Higher Credit Limit

With a good credit score and your credit history in good standing, you’re considered a low-risk for lenders. And this means they aren’t afraid to increase your credit limit. This gives you increased borrowing capacity, or the ability to borrow more money. And it’s all because of your good credit score, which shows that you pay your bills on time.

The Consequences of a Bad Credit Score

A low, or bad, credit score can cause financial complications. And a bad credit score can even hold you back, costing you more money and more frustration in the long run. 

A low credit score can limit everything from your borrowing ability to your line of available credit to your interest rate. But it could also impact other huge factors. The following are some of the negative effects of a bad credit score.

Financing Denials

When lenders see a bad credit score, they assume a borrower is high risk. And this means you’re less likely to repay the money you borrow, so lenders are less likely to offer you any credit. Your score can result in denied applications, whether you’re trying to open a new credit card or get an auto loan.

Higher Interest Rates

A bad credit score implies risk – and if you default on your loan or fail to repay your credit card, the lender won’t get their money back. As a result, those with low credit scores often get stuck with incredibly high interest rates. And this means you pay more money in interest with every bill you pay.

More Expensive Insurance Premiums

Surprisingly, your credit score affects your insurance premiums. This is because insurance companies say those with bad credit tend to file more claims. So, if you have a poor credit score, you’ll have a higher monthly premium regardless of whether you’ve ever filed a claim.

Does Achieving a Perfect Score Matter?

While good credit is something everyone can strive for, some people want to hit an even more prestigious milestone: perfect credit. An 850 credit score is considered a “perfect” score – and that’s because it’s the maximum score in today’s standard credit range.

So, if a good credit score gives you more freedom than a bad credit score, what happens if you achieve a perfect credit score? Many people assume that you get access to even better financial options.

But the truth is nothing really changes.

If you’ve managed to hit the perfect credit score of 850, you won’t really notice a difference. First, and most importantly, achieving an 850 is nearly impossible. Any little red flag or blip on your credit report will keep you from this elusive score.

And if you do have an 850, there are no perks. No lender, no credit card, no financial institution requires an 850 to qualify for its products. Anyone with a good credit score within 90 to 130 points of a score of 850 will be approved for the exact same loan terms and the exact same financing deals.

So, if you’re shooting for a perfect score, know that “good” is absolutely good enough. You can qualify for the very same perks and financial benefits with good credit as with a perfect score.

Make Sure to Pay Attention to Your Credit Score

Your credit score matters. And it might matter more than you realize. It can affect everything from your insurance payments to the interest rate on your credit card. 

That’s why it’s important to stay on top of your credit score. While you don’t need to keep a constant eye on your score, it’s a smart idea to be aware of your score throughout each year. With tools like free credit reports, credit monitoring tools and apps, and websites that can alert you to credit score changes, you can take control of your score. 

When you know where your credit score stands, you’ll be able to take advantage of better offers, better financial deals, and better negotiations.