By Lim Chan

Writer/Reporter

You might have heard this before when purchasing a vehicle or a piece of property, “x% APR for well-qualified buyers.” You might wonder, shouldn’t the company be fair and offer that same low APR to everyone who is interested, instead of only to so-called well-qualified buyers? While that idea may seem reasonable at first, it doesn’t align with how the credit industry works. Let’s explore why building credit in the U.S. is important and how having a high credit score can potentially save you thousands of dollars.

What Is a Credit Score?

A credit score is a three-digit number, typically between 300 and 850, that represents your financial reliability and risk level or in other word the likelihood you will pay your bills on time. Creditors and lenders consider your credit scores as one factor when deciding whether to approve you for a new account. Your credit scores may also impact the interest rate and other terms on any loan or other credit account for which you qualify.

Now that we know what a credit score is, how is it determined?

What Factors Affect Your Credit Score?

Credit institutions typically use the following components:

Payment History- Records of missed or late payments, including bankruptcies and accounts sent to collections.

Amount owed (debt-to-credit ratio)- Your total debt divided by your total available credit. Lenders generally prefer to see a ratio of 30% or lower.   

Length of credit history- The average age of all your credit accounts, as well as the age of your oldest and newest accounts.

Credit mix- How you manage different types of credit such as installment loans (car loans, personal loans, mortgages) and revolving loans (credits cards and other types of credit lines).

New credit inquiries- Applying for a new line of credit and numerous hard inquiries within a short period of time can negatively impact your credit score.

What Is Considered a Good Credit Score?

Here is a general classification used by lenders.

300-579: Poor

580-669: Fair

670-739: Good

740-799: Very Good

800-850: Excellent

How Can a Good Credit Score Save You Money?

For example, imagine two people walk into the same dealership to finance a new car priced at $50,000 (around the average new car price in the U.S.).

Person A has a credit score of 780 and qualifies for the best financing—0% APR for 60 months. (Note that a score of 780 is used as an example, since in most cases a “very good” credit score is sufficient to qualify for the best financing offers.)

Person B has a credit score of 550 and does not qualify for the best rate, instead receiving an 18% APR for 60 months.

Assuming no down payment:

Person A pays $50,000 total over the life of the loan.

Person B pays approximately $76,260 total over the life of the loan.

That’s a difference of $26,260, simply due to an individual’s credit score.

You might not pay much attention to your credit score, but it is an important factor that can significantly impact your financial future. Maintaining good credit, along with strong financial planning and personal money management, is key to achieving better financial outcomes.