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The true cost of a low credit score

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.

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"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.

For 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 MyFICO:

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 $31,002 more.

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.

Worse 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.

BorrowerFICO scoreAmount of loanInterest rate Mo. payment Total interest paid Difference
A 720-850$200,000 5.922$1,189$228,072 0
B675-699$200,0006.584 $1,275$259,074$31,002
C620-674$200,0007.734 $1,431 $315,021$86,949
D 560-619$200,0008.531$1,542$355,200 $127,128

If at 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.


 
 
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