On a scale of 300 to 850, where is your credit score? Credit scores are synonymous with credit cards, home loans, and car loans. Why? Because they determine your borrowing costs.
A good or bad credit score spells a difference in hundreds or thousands of dollars in interest cost savings. So, how far will your credit score take you?
Let’s take you to nonprime deals, too.
Good or Bad Credit Score
Credit scores range from 300 to 850. While lenders vary on what
constitutes a good score, the common census is good to excellent credit is the high 600 to 850 while 300 to 690 is bad to average credit.
Each individual has a credit score that is assigned by the three credit bureaus – Equifax, Experian and TransUnion. These credit reporting companies rely on the FICO scoring model with their own tweaks.
FICO, for its part, calculates credit scores based on payment history, amounts owed, length of credit history, type of credit and new credit. Each factor is not equal with payment history (35%) weighing more than amounts owed (30%), length of credit history (15%), new credit (10%) and type of credit (10%).
To lenders, these three-digit scores reflect the risk the borrower carries and thus assign the interest rate based on this creditworthiness.
How Much Your Credit Score Will Cost You
The disparity between poor and good credit score holders is found in the interest rates they get when they borrow money for any major purchase.
To illustrate this,
Financial Industry Regulatory Authority (FINRA) has this example of two consumers with varying credit scores taking out on a similar 30-year mortgage for $200,000.
- A consumer with a credit score in the 760-850 range might be charged with 3.307%.
- A consumer with a credit score between 620 and 639 might be given 4.869%.
The first consumer will pay $877 every month while the second consumer will pay $1,061. That’s a difference of $184 and over the life of the loan, results in $66,343.
Lenders are accessible here.
“The higher the credit score, the lower the interest rate” also applies to credit cards. A good credit score can help beat rates as high as
22% on some credit cards. Although, you won’t know your actual APR until you submitted your application.
From car loans to car insurance to business financing, they all rely on credit scores.
So, Where Do You Stand?
Obtain a free copy of your credit report at
www.annualcreditreport.com. From there, you can assess your overall credit situation, which areas that can be further improved on.
For instance, you can focus on paying your bills on time, every month. This leads to a healthier payment history and reduced chances of delinquency.
You can also try to reduce your credit card spending so you only utilize
30% or below your credit limit.
If you have derogatory records like
civil judgments or tax liens, they might be wiped out of your credit report for lack or dated information and result in a modest credit score increase.
As every financial planner might have told you, live within your means. Manage your finances better. Your
improved credit standing will show to your future lender.
Get Your Free Mortgage Loan Quote Today