What is a credit score? What are your credit score(s)?
The following is an extreme illustration of how interest rates can fluctuate based on your credit score.
The finance companies who work with auto dealerships, for example, will base their interest rates on your credit score.
If you have the very low score you could pay as high as 21.9% from high risk lenders. If you have a high credit score, you could pay as low as 1.9%, or whatever interest rates are promoted by the car dealer ads. That's a difference of 20% interest.
WHY DO CREDIT COMPANIES CHARGE HIGHER INTEREST FOR LOWER SCORES?
A lower credit score means that you're a higher credit risk to the credit companies. The reason that you get a lower credit score is that you don't have a perfect credit rating. You've missed payments, haven't paid a bill, etc.
It costs money to collect a delinquent debt and the creditors have to charge for that by increasing interest rates for high risk customers. If the company has to collect money from you, they have to get a separate collections department involved, send out notices and even get legal help to get a judgement. These collection activities all cost the creditors more money. They're more than happy to pass these costs on to you!
CREDIT INFORMATION STAYS ON YOUR REPORT FOR UP TO 7 YEARS
Let's say that you had bad credit a few years ago, but have made your payments perfectly ever since. Your credit score is still going to suffer because of the problems you had in the past. The reason that credit items stay on your credit report for 6-7 years is because the creditors want to know that your finances have been stable for a long period of time. A creditor uses your credit score as a guide to help them decide what type of credit risk you are.
GOOD CREDIT OR BAD CREDIT?!
YOU STILL MAY BE ABLE TO INCREASE YOUR CREDIT SCORES!
Even if you've got good credit and always make your payments, you could still increase your credit scores because of inaccurate items that listed on your credit reports. I had one client who had one credit card listed on his credit report 3 times and another credit card listed twice amongst other problems. This lowered his credit score by 84 points with TransUnion and 65 points with Equifax. Even though he paid his bills perfectly every month, the creditors and credit bureaus had made these mistakes that cost him thousands of dollars in interest costs each year. As well, as soon as his credit report was cleaned up, he was able to get a substantially higher line of credit with two creditors who previously refused him increases!!
You won't know what your credit score is until you see what's on your credit reports? Good credit or bad, you always need to see your credit reports at least once per year!