How Your Credit Score Affects You (And Your Wallet)

How Your Credit Score Affects You (And Your Wallet)

by Nancy Beyer, December 2009

The use of credit scores is no longer limited to banks and creditors making quick lend or don't lend decisions or determining the terms and interest rate you will pay for a loan. Today, credit scores are used by many types of businesses including merchants, utility companies, insurance companies, employers, and landlords.

Credit scores are becoming more and more important in everyday life. They are used for many major yes/no decisions—from loans, to employment, to goods and services. In this regard, a consumer has some protection. Federal law requires a company to tell you if they denied your application for credit, insurance, or employment based in whole or in part on your credit report.

Beyond yes/no decisions, credit scores are frequently used to calculate interest rates when you borrow money. And this is where your credit score can make a huge difference—not only in monthly payments, but in the total amount you repay over the life of a loan. Consider these two examples:

Example #1 - Home Mortgage (30 year fixed rate)

$200,000 Mortgage
Interest Rate Monthly Payment Total Paid in 30 Years
High Score5.847%$1180$424,620
Average Score6.353%$1245$448,200
Low Score10.844%$1881$677,160

Example #2 - Automobile Loan (48 month fixed rate)

$20,000 Automobile Loan
Interest RateMonthly PaymentTotal Paid in 4 Years
High Score6.981%$479$22,992
Average Score9.270%$500$24,000
Low Score14.785%$554$26,592

Of course, these are just examples and most credit score models are broken down into more tiers, but it's easy to see how a low (or poor) credit score can add thousands—even hundreds of thousands!—of dollars to the cost of borrowing money. Keep in mind that a "high" score for an automobile loan may not be the same as a high score for a mortgage. And if your score is below the minimum threshold set by a lender, you probably won't qualify for a loan at all.

Knowing and understanding your credit score can give you leverage to negotiate the best rates on a loan. Checking your credit report and credit score well in advance of applying for a loan can help avoid surprises and give you time to correct errors or make improvements. To get your free credit report and score today go to, LegalZoom's preferred provider.