Sure you know your credit score
can affect everything from whether you qualify for a mortgage to the rates you pay for insurance, but have you ever made a plan to consciously improve your score? If
not, it can be costing you dearly.
"When it comes to mortgages,
auto lending and credit cards, the higher your score, the lower
the interest rate you're going to pay," says Barry Paperno,
manager of customer service for credit scoring company Fair Isaac,
which created the widely used FICO credit score. So the time and
effort it takes to improve your credit score could save you hundreds
of thousands of dollars over the course of your lifetime.
most people, a mortgage loan is where they'll reap the greatest rewards from an
improved credit score.
"For the past two or three years, mortgages have
been the lowest in 30 or 40 years, but that doesn't apply to everybody,"
says Janette E. Jones, mortgage consultant for American Home Mortgage
in Bethesda, Md. "That applies to people who have excellent
credit. Someone who has excellent credit can actually get a fixed
rate loan for 5.5 percent. However, for people who have less-than-excellent
credit -- and I would say that's anything below 650 (on the FICO
scale of 300 to 850) -- they're looking at an interest rate that's
1 percent higher, at the bare minimum."
While the median FICO score in the United States is
723, which would yield favorable loan conditions, for those whose
score falls way below that mark, the ramifications are costly.
Breaking down the numbers
A median of 723 means half the people fall below that
score and half have scores higher. More specifically, here's a breakdown
of how scores are distributed across the population, according to
300-499 = 2 percent of the population
500-549 = 5 percent
550-599 = 8 percent
600-649 = 12 percent
650-699 = 15 percent
700-749 = 18 percent
750-799 = 27 percent
over 800 = 13 percent
According to MyFICO, a division of Fair Isaac, a consumer
with a FICO score between 720 and 850 might get a 5.922 percent
rate on a $200,000 30-year fixed mortgage rate. That would give
him a payment of $1,189 a month and $228,072 in interest over the
life of the loan. A consumer with a FICO score between 675 and 699
might get a 6.584 rate on the same loan, which would cost him $1,275
a month, with $259,074 in interest over the life of the loan, or
The consumer with a FICO score between 620 and 674
might get a 7.734 percent rate and pay $1,431 per month, costing
him $315,021 in interest over the life of the loan. That's $55,947
more than the middle-score borrower and $86,949 more than the borrower
with excellent credit.
yet, a consumer with a score between 560 and 619 might get an 8.531 percent rate,
pay $1,542 per month and pay $355,200 in interest over the life of the loan. The
difference in interest paid over the life of the loan between the first and last
example is more than $127,000.
score||Amount of loan||Interest
rate ||Mo. payment ||Total
interest paid ||Difference |
first you don't succeed
While the dollar amounts are most striking when it comes to primary
mortgages, the effects of lower credit scores are not limited to
your purchase of a home. If you want to refinance and pull out some
cash to finish your basement or pay off some credit card bills,
your credit score can not only determine your interest rate, but
it can also dictate how much of your equity you can cash out. The
higher your credit score, the higher the amount you'll be able to
pull out. "Someone with a credit score of 580 might only be
able to receive 70 percent of the equity in their home while someone
with a 600 might be able to take out more," says Jones.