The lower your credit score, the more money you will pay for your new car loan, for a mortgage or for any other credit. Creditors and lenders calculate your loan based on your credit score, a three-digit number that fluctuates regularly. If you are about to make an important purchase and will need new credit, you should know your credit score.
Your credit score is based on five categories, including your credit history, the types of credit you have, the age of your accounts, your outstanding debt and the number of accounts you have.
One of the more popular credit scores is your FICO score, what looks at the five categories and assigns a percentage of importance to each one. Your payment history composes 35 percent of your score and the amount you owe on your balances represents another 30 percent. The length of your credit history adds another 15 percent. Your new credit and types of credit used add 10 percent each. Your FICO score looks at information on your credit report to assign a three-digit number. You can obtain your credit score by visiting www.myfico.com.
Your FICO score occupies a range from 300 to 850. To obtain most loans, you need a score of at least 620. The average score for all consumers is 723 according to MyFico.com.
A good credit score ranges from 700 to 759 with anything higher representing excellent credit. Auto loans, mortgage rates and most other published consumer loan rates are based on excellent scores. Thus, if your score is considered good, you might pay .25 percent more for a loan.
As your score drops, incremental increases in your interest rates may add as much as 1.6 percent to your loan according to Credit Card Forum. A score below 620 would be considered subprime and you would not qualify for a standard loan notes Legal News.
Doing the Math
The cost factor for lower credit begins to hit home when you do the math. For instance, a $100,000, 30-year mortgage at 4 percent interest would cost the buyer $477.42 per month. The buyer would make 360 payments totaling $171,869.51 with $71,869.51 in total interest paid.
For the person with good credit, the mortgage interest rate might stand at 4.25 percent. That same loan would cost $491.94 per month with the total interest paid coming in at $77,098.36, an increase of $5,229.
An even more stark difference surfaces for the person who has a credit score of 630, near the bottom of the acceptable range. That same mortgage might carry an interest rate of 5.5 percent, pushing monthly payments to $567.79 with total interest paid of $104,404.04. The difference between excellent and poor credit here is most profound: over the course of the mortgage an additional $32,500 in interest would be paid.
Costing or Saving You Money
Your credit score does matter. It is a three-digit number that can save you money if it is high or cost you money if it comes in lower. Managing your credit reports can help you improve your score, saving you hundreds to thousands of dollars on certain kinds of loans.