If you borrow money for a new home or a new car, you understand the importance of your credit score. Having a good credit score can mean the difference between a great interest rate and one that is so high that it will cost you thousands of extra dollars in interest.
But, what kind of interest rates can you expect based on the credit score that you have. If you have not checked your credit score in while, my financial planners and experts highly recommend that you check your credit score and credit report at least once a year. You can win the credit score game. It is possible!
What Is A Good Credit Score?
Each lender that you apply to borrow money from has set criteria as to what makes a great credit score. Many lenders start raising your interest rates if your FICO score has dropped below 720. So, any score above 720 is typically considered good, but you may need as high as 760 to qualify for the best 30 year mortgage. FICO is a proprietary credit score developed by the Fair Isaac Corporation, and it is practically the only credit score that matters. Over 90% of all lenders rate potential borrowers based on their FICO credit score.
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A FICO credit score range is from 300 to 850. One of the biggest problems with receiving your free annual credit report from the three credit bureaus is that it does not include your score. You have to pay for that as an extra charge (typically $20 at the most). I recently purchased myFICO score, and it was very interesting to see a breakdown of how different credit scores can lead to higher interest rates.
A Bad Credit Score Can Cost You Thousands
The difference between having a great credit score and just a decent one is also a difference of over 1.5% on a 30 year-fixed mortgage. It can also be a difference of 3.5% or more on a 48 month car loan. Heaven forbid if you have a poor score, you could be facing an interest rate of 17% of more on a car loan.
While one or two percentage points do not seem like a lot initially, they can add up to some serious money over time. For example, you could pay just over $126,000 on a $200,000 home with a 30 year mortgage at today’s rate of 3.585%. Or, you could pay $68,000 more in interest payments over the course of your loan if you had a credit score of 639 or less.
A poor score can also cost you almost $8,000 extra in interest on a new car loan if you have a poor credit score when compared to those with the best credit, 720 or higher.
While you may be quick to right off one or two percentage points on your home mortgage or car loan because you have good credit and not great credit, it would be a mistake that could cost you thousands of dollars. Now is the time to continue focusing on improving your credit score before you need it to apply for a new loan.