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Akshay Parikh:

Credit scores. What are they, exactly? And why do they matter? Your credit score is a simple number given to you by a credit bureau, and it's based largely on how well you've managed your debts in the past.

It gives potential lenders a sense of how likely it is you'll pay off any new debt on time and in full. A solid credit score, anything from 580 to the top score of 850, suggests that a lender can trust you. But a low score, anything from 300 up to 580, says the opposite. If your score is low, the repayment terms offered to you on home, car, or other types of loans could be punishing.

If your score is low enough, lenders might not give you a loan at all. Your score can also affect other areas of your life beyond accessing credit, like the rates you pay for home or auto insurance, or making it through a credit check by a potential landlord or employer. So let's see how this can work for a home mortgage. Imagine two people, Ethan and James.

On paper, they're very similar. They went to the same college, they're both software engineers for the same firm in Chicago, they even have the same amount of money in their bank accounts. The big difference is their credit scores. Ethan has a credit score of 770, which is considered very good.

James' score is just 630, which is considered just fair. Let's say the two of them want to buy identical homes right next to each other in Chicago for $500,000 each. Both are ready to put $100,000 down. Both go to the bank and ask for a 30-year loan of $400,000.

Ethan's credit score suggests that he's a safe bet. James' score suggests there's more of a risk he won't pay it back on time and in full. What happens is that the bank charges the two men different interest rates. For Ethan, the credit superhero, the bank offers a loan charging him 6% interest.

For James, the credit risk, the interest rate is 7%. This interest rate difference translates into real money out of James' pocket. Compared to Ethan, he's going to pay $210 more per month for essentially the same home. This might not sound like a whole lot of money until you realize that this is every single month, year in and year out, over the course of 30 years.

James will likely end up paying a total of roughly $767,000 over the lifetime of the loan. This is the $400,000 in principal plus all of the interest that's added on top of that. Ethan will likely end up paying much less, somewhere in the area of $690,000. In other words, just because Ethan had a better credit score, he'll save nearly $80,000 over the lifetime of the loan.

So let's recap. Your credit score is an estimate of how likely you are to repay your loans on time. Scores can range from 300 to 850. The higher the number, the better.

As your score goes up, the amount you ultimately have to pay in interest for a loan goes down. And that's money in your pocket. For more on how credit scores are calculated and how to improve yours, please watch our video, "6 Steps to a Better Credit Score."

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