The Impact of a Credit Score

If you're applying for a mortgage, auto, business or personal loan, you'll need a good credit score to both gain approval and to qualify for the lowest interest rates. That's why it's so important for borrowers to pay their bills on time, cut their debt levels and avoid bankruptcy. Life with a bad credit score can be a challenge today.

Qualifying

Higher foreclosure rates have made lenders skittish.

Many lenders will not give out loans to borrowers with credit scores below 620, according to financial Web site Bankrate.com. These borrowers are considered higher risks to default, a real fear today. Consider that one in every 417 U.S. housing units received a foreclosure filing in November of 2009, according to RealtyTrac.com, and it's easy to understand why lenders fear defaults today.

Higher Interest Rates

You'll have to pay more money if your credit score is bad.

Even if you do qualify for a loan with a bad credit score, you'll have to pay higher interest rates. Lenders charge bad-credit borrowers with higher rates as a way to protect themselves financially.

You'll Pay More

Expect to pay more of these each month with a bad credit score.

Being charged a higher interest rate because of a bad credit score can be significant. For instance, homeowners with a $200,000 30-year fixed-rate mortgage loan with an interest rate of 7 percent will pay $1,330.60 each month to their lender. The same homeowners with the same loan but with an interest rate of 5 percent, though, will pay $1,073.64 every month. That's $256.96 more every month, or $3,083.52 a year.

Good Scores Bring Benefits

A good credit score may equal less paperwork.

If you have a good credit score, not only will you qualify for lower interest rates, you also can take advantage of the incentives that lenders sometimes offer. For instance, if your credit score is high enough, you might be able to apply for a mortgage loan without having to fill out as much paperwork.

More Options

More lenders are willing to work with good-credit borrowers.

Borrowers with bad credit scores generally have fewer choices when it comes to obtaining auto, mortgage, business or personal loans. Fewer lenders, especially in trying economic times, are willing to lend money to risky borrowers. Those borrowers with high credit scores, though, will have their choice of lenders with whom to work.