One of the most important bits of financial information floating around is your credit score. Your credit score is basically a measure of your financial reputation. Creditors, from mortgage lenders to credit card issuers, use your credit score to determine what kind of a risk you are. If you are considered an acceptable risk, meaning that you are likely to repay your loans, you will be offered a lower interest rate. If your credit score is low, you will be considered a higher risk. In order to offset the increased risk of default, creditors will charge you a higher interest rate.
Understanding Your Credit Score Range
Most creditors, though, help iron out some of the lumps in the credit scoring system by using a credit score range. By lumping credit scores into ranges, it makes it a little easier to account for differences in credit reporting and individual creditor versions of FICO. When considering whether or not you have a good credit score, it can help to realize these credit score ranges:
- Excellent: 760 and above
- Good: 700 – 759
- Average/Fair: 660 – 699
- Not that great: 620 – 659
- Poor: Below 620
Once you drop below 620 on your credit score, you will generally have to pay much higher rates. Indeed, when it comes to home loans, you might not even be able to get approved unless you are getting your mortgage with the help of a government program through the FHA. Even then, you will need a credit score of at least 580, and you will not get the best interest rate.
What score allows you the best interest rates on home, auto and credit card loans often depends on the state of the credit market. If things are relatively loose, you don’t need a really high score in order to get a good interest rate. Last year, you needed at least a 760 to get the best rate on an auto loan. As of March 7, 2011, according to MyFICO.com, a 720 will result in the best interest rates on an auto loan. When lenders are more comfortable with the economic climate, they are more likely to approve you with a lower credit score range (even below 600), and give you a better deal when you have good credit.
How You Can Save with a Better Credit Score
As you can see, if you have a good credit score of at least 720, you can get a 4.9% interest rate, and a monthly payment of $471. If your score is just in the fair range, at 665, you would have to pay 8.263% interest, and make a payment of $510 each month. That’s a difference of $39 a month. Over the course of five years (60 months), that adds up to $2,340.
That’s a pretty big deal. The savings you could see with a higher credit score range are even more pronounced when you are talking about a mortgage:
Since you are dealing with bigger numbers, the difference is going to be bigger as well. With the best credit score, you can get the best interest rate, and pay only $922 a month. If your score is still “good” – between 700 and 759 – you will pay $946 a month. That $24 a month doesn’t seem like that big of a deal. Until you consider how many years you’ll be paying that difference. If you had your mortgage for the full 30 years (360 months), the cumulative difference is $8,640. Even if you only had that mortgage for 10 years (120 months), the difference is $2,880. Think of what you could do with that money if you weren’t paying interest!
With credit cards, there are generally better rewards programs and lower interest rates if you are in a better credit score range. Many credit cards have a three-tiered system for interest rates. For those with the best credit, you might see an interest rate of 11.9%. The next rate might be 15.9%, and those with a lower credit score range might pay 19.9%. There are also subprime credit cards that might charge anywhere between 23.9% and 49.9% interest (or more!).
As you can see, a better credit score results in very tangible results when it comes to saving money. Improve your credit score range, and save money when you borrow.
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