It’s important that you know where your credit stands. Because if you don’t take the time to find out and apply for a loan, not knowing your credit score and what’s contained in your credit reports could end up costing you hundreds or even thousands of dollars .

Checking your credit score and at least one of your credit reports doesn’t take much time. It also shouldn’t cost that much since you can view all three of your credit reports once a year for free, while many credit card issuers also allow you to access at at least one of your credit scores at no charge. Even if you have to pay to check your credit score, the cost can be as low as $1 (offered as a free trial through Equifax that you need to cancel in 7 days or you’ll be charged $19.95 a month for the service).

But why is this important? Here’s why: if you don’t know where your credit stands, there’s a chance that if you’re applying for credit, you could be charged a higher interest rate than you should be. Interest rates that banks and other lenders charge are based on formulas that take into account your credit score and credit history. In doing so, lenders come up with a base interest rate. This rate can vary across lenders, which is why you shouldn’t settle for applying for credit with just one lender.

In addition, middlemen such as car dealers (and mortgage brokers) can typically raise the interest rate a certain percentage over the base rate in a practice known as rate participation - and profit from the difference. For example, an auto lender might set a base interest rate of 4.5%, and offer the car dealer the option of raising the interest rate to a maximum of 6.5%. The difference is then given to the dealer usually in monthly installments once the finance contract is signed. In some cases the dealer is allowed to keep the entire difference, while in others the dealer and the lender split the difference based pre-set conditions.

The result is that you, the borrower, end up with a higher monthly payment based on the higher interest rate than you actually qualified for. If you haven’t rate shopped or done any research to see the interest rates others with the same credit score have qualified for, you’re none the wiser, and could end up, over the loan term, paying hundreds or even thousands of dollars more for a vehicle.

 Understanding Credit