As a numerical representation of how well we manage our finances, our credit score is like a grade point average. It’s computed as a weighted average, with certain categories — like payment history and the amounts we owe – holding the most weight. The more diligent we are in maintaining good financial habits, the better our score.
Why should you care about your credit score? As obvious as this question seems, the self-evident nature of this question is not reflected within credit score data. According to data published on Credit.com, the average Fico score was around 689 as of late 2012. This is only a fair score, and it’s in a range where you can receive a loan from a lender with acceptable terms. You may be able to refinance your mortgage, buy a car, and open up a line of credit. With this score, however, you will not get the same rates as a person with an excellent score of above 750.
If someone offered you $10,000 today and in exchange, you had to pay them back $11,325 over the course of five years, you may consider taking such a deal. However, if instead of $11,325 you had to pay them back $17,610, you may have second thoughts. This is the type of difference interest rates can make, but when you hear amounts in terms of installment payment amounts instead of total amounts, the difference doesn’t sound nearly as remarkable. Six thousand dollars sounds like a lot more than $20 more per month.
Think of it this way: When you open a checking or money market account, you receive interest on your money, and the higher the rate, the better. With a credit card (and most loans), you are on the opposite end of that transaction — you are the one paying the interest, in that same manner, to the company. You can lower your rate and pay less in interest by improving your credit, a factor within your control.
Oftentimes, damage to credit occurs when you are young and have not yet become completely financially established. Sometimes, job loss, illness, divorce or other situations resulting in financial strife can cause credit to drop. Regardless of the reason, credit is not something that you can repair overnight. That is, you cannot take your score from a 500 to an 800 in a week. You can, however, take certain measures to improve your credit that will have a relatively immediate impact.