Your credit score is important for many reasons, but most of all because it plays a large part in whether you can qualify for loans. This score, calculated by financial services companies called credit reporting agencies, represents your perceived credit worthiness. The higher your score, the more creditworthy you will appear in the eyes of lenders. This score may help impact your financial planning a number of ways.
Loans
When you wish to take out a loan, you must apply to a lender. The lender will then look at information related to your financial status and credit history and render a decision about whether he wishes to lend you money and, if he does, at what rate of interest he wishes to offer. The higher the rate of interest, the more money you will have to spend to pay back the loan.
Debts
The rate of interest that you pay on a debt directly affects the total amount of debt that you take on. Often, people with low credit scores are pushed deeper into debt because they can only qualify for loans at a high rate of interest. When struggling to pay back a loan, you may miss a payment, pushing you deeper into debt. This can lead to being hounded by debt collection agencies.
Debt Collection
When a creditor is not paid, she may attempt to remedy this situation through a number of different ways. These creditors have a number of different arrows in their debt collection quill, including filing a suit against you. If a creditor files a suit and wins, she will be awarded damages that she can potentially collect through wage garnishment or through the seizure of funds from your bank account.
Bankruptcy
Sometimes, a person's debts will snowball as he accumulates late fees and penalties on his outstanding debts, all while being hounded by debt collectors. You may seek protection from these creditors by filing for bankruptcy. Bankruptcy will either nullify many of these debts or give you more time to pay them off. However, the downside is that declaring bankruptcy will ruin your credit score, which will mean you will likely receive high interest rates on debts for some time after the declaration if you qualify for loans at all.
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