Credit scores are used by lenders to gauge a consumer’s qualification for all kinds of credit. Mortgages, personal loans, auto loans, and credit cards are just some of the reasons a lender will pull your credit and check your “worthiness”. A lender will use your credit score to determine two things; Whether you are approved for a new line of credit and what interest rate that line of credit will incur. If your score is low or marginal, a creditor understands that they are taking more risk in approving your loan and will charge a higher rate to compensate for that risk. For you, that means its in your best interest to know your credit score, and make sure that it’s as high as can be.
The score most commonly used by creditors is the FICO score, named for the company that offers it (Fair, Isaac, and Company). Your FICO score quantifies several factors that interest creditors like your payment history, debt load, the length of your credit history, any recent credit applications, and types of credit. The score ranges from 300 to 850, with a current median score of 725. For those wondering what is a good credit score, my personal opinion is anything over 700. Soaking all of that information in, do you know how these numbers affect your life?
Let’s say for example that you’re planning to buy a home. Currently, mortgage rates would dictate that interest will vary from 4.403% for a stellar credit score, to 5.992% for a score around 620. (Below that, you might have trouble getting approved at all) The median score of 725 will land an interest rate of 4.625%. Let’s take a look at how your credit score will affect how much you’ll pay for a $200,000 mortgage.
- With a credit score of 825, the consumer would have an interest rate of 4.403%. On a $200,000 30-year fixed rate mortgage, the consumer would spend $1,001.88 per month. After 30 years a total of $360,675.46 would be paid on your mortgage.
- With a credit score of 725, the consumer would have an interest rate of 4.625%. On a $200,000 30-year fixed rate mortgage, the consumer would spend $1028.28 per month. After 30 years, a total of $370,180.45 would be paid on your mortgage.
- With a credit score of 620, the consumer would have an interest rate of 5.992%. On a $200,000 30-year fixed rate mortgage, the consumer would spend $1198.07 per month. After 30 years, a total of $431,306.13 would be paid on your mortgage.
On a 30-year mortgage, the holder of the stellar credit rating will pay $1002 per month. The median scorer will pay $1028, and bottom will pay $1198. That may not seem like a huge difference, but consider this that the person with the best credit score will pay $160,675 in interest over the life of the loan. Median scorers will pay $170,180. and debtors with a mediocre score will pay $231,306 over the life of the loan. That’s over $60,000 in additional interest over the course of the loan, $2000 per year. In the first years of the mortgage, that could buy dinner for two at a well-priced restaurant each and every week.
So how do you go about finding out what your credit score is? You’re first step should be to visit AnnualCreditReport.com. Each and every year, by law, you are entitled to your credit report and score from each of the three major credit bureaus (Experian, Equifax, TransUnion). You can spread your three reports out over the course of the year but once you have received your reports from each bureau, you’ll have to look somewhere else for your credit score.
GoFreeCredit.com would be our first recommendation as they are currently offering a 7-day free trial offer to view your triple bureau credit score. The GoFreeCredit.com interface is extremely easy and friendly to use and as long as you cancel your trial membership within the 7-day period, you will not be billed a single penny. You’ll receive access to all three of your credit scores (one from each bureau) which should give you a better understanding of what interest rate you’ll fall into.
I’ll be the first to admit that my credit score has been broken and beaten ever since I applied for a mountain of college loan debt. I’m slowly working my way up the FICO score ladder but only after another 5 years or so will I feel confident in applying for a home loan. Do yourself a big favor now and find out what your current credit score is. Work hard to improve your credit score so that when you need it, you won’t be paying an additional $60,000 in unnecessary interest.
{ 3 comments… read them below or add one }
Thanks for showing the numbers in relation to mortgages. Seeing how much your credit score directly effects your monthly payment is really shocking but necessary.
Great post guys loved it. Thanks for sharing it.
As far as credit goes, my husband and I have zero. Both of use paid for our four years of college up front, never rented from a stranger, have paid all bills on time, bought only what we could pay for up front, and still we are not even on the charts. We feel that any way to build up credit is impractical, such as buying overpriced furnature on monthly payments when we have furnature that works fine. We also feel trapped into renting forever, because we don’t have much left when the bills are paid. I have also heard that new legeslation has made it impossible to build credit if you pay your card on time each month – is this true? Any suggestions?