What is a Good Credit Score Worth?
December 9, 2011
What’s a good credit score worth?
A good credit score is vital for loan approval and can help you borrow at lower interest rates. Depending on how much you borrow a good FICO credit score could be worth hundreds or thousands of dollars.
What is a good credit score?
A good credit score falls in a range of 675 – 850, the strength of the score depends on which credit scoring system you’re using.
Good Credit Score Range
Before you get a handle on what is a good or high credit score, you first need a basic understanding of how the scoring goes. FICO, which is the primary credit score that lenders around the country use, starts at 300 and goes up to 850. A good FICO score starts at 675 and goes to 699. A very good credit score picks up at 700 and goes to 799. An excellent credit score ranges from 800 to 850.
Prior to the downturn in the economy and stricter lending guidelines, a good credit score could get you far. A good credit score could get you an auto loan, mortgage or credit card, with favorable terms and a fair interest rate. Since the downturn in the economy and the stricter lending guidelines, your credit score has to be higher to get approval from some lenders.
Journey to a Good Credit Score
The calculation of your credit score has of five components: payment history, balances, credit history, types of credit and new credit. Each component has a higher weight than the one that follows it, so these are in order of importance. If you want to boost your credit score into the good, very good or excellent category, then these five components play a vital role.
1. Payment history (35%)
The primary way to boost your credit score is always make your payments on time.
2. Balances (30%)
The second way to boost your credit score is to maintain manageable balances on your credit accounts. If all of your credit cards are at the limit, then pay down or pay off the balances. Maintaining a manageable debt level is another boost to your score.
3. Credit history (15%)
Time is on your side when attaining a higher credit score. When you have long and positive relationships with your creditors, this boosts your credit score. Avoid opening and closing credit accounts and loans. Instead, maintain your account and credit relationships.
4. Types of credit (10%)
You should also vary the types of credit accounts you have. Having a mixture of credit cards, auto loans, student loans, mortgages and store credit accounts can help. You can attain a good credit score more easily if you have a mix of credit account types.
5. New credit (10%)
Finally, establish new credit accounts once in awhile. If you do not have a combination of different types of accounts, this is an opportunity to open a new account using a new type of credit.
What’s a Good Credit Score Worth?
Your credit score may actually be used as a criteria for more than approval for a car loan or home loan these days. In some cases employers, rental agencies, and insurance companies may check your credit score before hiring you, renting to you, or writing an insurance policy for you.
The impact of these uses are hard translate into dollars since your credit score isn’t used in all cases and we don’t know how exactly its being used. Just be aware that the value of a good credit score goes beyond approval and interest rates on loans.
It’s not simple to say for sure how your credit score will impact your loan application since there are different credit scoring systems and lenders use other criteria in addition to your credit. One thing’s for certain, the more money you’re borrowing, the more you’ll pay in interest. So your credit score often has the biggest bottom line impact on a home loan.
You can get an idea of how much a good credit score can save you, or a bad credit score can cost you, from the credit score calculator on the MyFICO site. Below is a snapshot of the estimated monthly payments for each credit score range on a 30 year fixed mortage of $300K.
|FICO Credit |
|Monthly Payment||Monthly Savings|
As you can see the savings from one credit score tier to the next is significant. If you compare the best credit score tier to the worst credit scores you’re looking at almost $300 a month difference.
If you’re in the bottom tier of the table you’ll obviously have to pay a higher interest rate, which means thousands of dollars over the life of your loan. Not only that, lending requirements have tightened enough that you may not be able to get a loan at all. So how can you build up your credit history to improve your credit score if no one will give you a loan?
One of the best ways to rebuild your credit is to use a secured loan or a secured credit card. Since the loan is backed by an asset, the lender is willing to take the risk of loaning you the money. If you make sure the lender reports to the credit agencies (Equifax, Experian, or TransUnion) and that you send in all your payments on time this approach should help improve your credit.
How to Check Your Credit Score
If you’re not sure where your credit score stands, there are several ways that you can check your credit score. In fact, you can get a free credit score from multiple sources online.
The FTC established a site called Annual Credit Report where you can get a free credit report several times a year. Unfortunately it doesn’t include your credit score but there are places you can check it without paying. Some of the sites, like Credit Karma, are free because they use a variation of the FICO score. It may not match your FICO score exactly but can give you a rough idea of where you fall.
Of course, we’ve seen that the difference between credit tiers can add up to hundreds of dollars a year in interest expenses. If you want to know exactly what your FICO score is then you can sign up for a free trial of several different services. As with all free trials, if you don’t cancel after the trial is over you’ll pay a fee.
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