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How a high credit score benefits consumers
One of the most important financial numbers in personal finance is the credit score. Credit score is commonly calculated by FICO, which is the Fair Isaac Corporation. However, another less well known credit score is the VantageScore. FICO credit scores range from 300 to 850, with most credit scores falling between 600 and 750 per Experian.
Before looking at the advantages of a high credit score, it is helpful to know what is actually considered a high score within FICO's range. According to Credit Karma, the breakdown of how the scores rate are as follows:
300 to 580 = Very Poor
580 to 640 = Poor
640 to 700 = Fair
700 to 750 = Good
750 to 850 = Excellent
So, anything over 750 is a great score to have, while anything between 700 and 750 should also be good. There are some reasons why having a score this high can be advantageous. For one, getting approved for things such as mortgages or car loans is more likely with a high credit score.
Benefits of a high credit score
The majority of people are going to take out a large loan at some point in their lives, and this process will be much easier if you have a high credit score. Creditors look at the credit score as a snapshot for how creditworthy and trustworthy a potential borrower is in terms of paying back the loan. With a high score, credit issuers will be predisposed to believe that a consumer is financially responsible.
Another huge advantage of a strong credit rating is the impact on loan costs. Furthermore, interest rateis substantially influenced by things such as credit history. The bigger the loan, the more of an impact a lower interest rate has on the amount that will paid over the life of the loan.
An article in US News from 2013 breaks down some of the interest rates borrowers would expect to pay depending on what range of credit score an applicant is in. Here is how they broke it down:
- With a FICO score between 620 and 639, borrowers would get a 5.671 percent interest rate.
- With a FICO score between 660 and 679, borrowers would get a 4.695 percent interest rate.
- With a FICO score between 760-850, borrowers would get a 4.082 percent interest rate.
Those are big differences, and the difference in the amount of interest that one would pay is staggering. Assuming a $250,000 mortgage, here is what a loan holder would pay in interest over 30 years with those three interest rates (per Bankrate mortgage calculator)
- 5.671 percent interest - $270,507.59 in interest, meaning the total paid would be $520,707.59.
- 4.695 percent interest - $216,503.59 in interest, meaning the total paid would be $466,503.59.
- 4.082 percent interest - $183,939.30 in interest, meaning the total paid would be $433,939.30.
Astoundingly, the difference between a high score and a low score, in this case, would be $87,000 over the life of a mortgage, which is huge. This is why it is such an advantage to be in a high FICO score range. Moreover, having a high credit score helps qualify loan applicants and saves them money. Improving credit score is an ongoing responsibility for borrowers and it is usually never too late to start building a higher one.