Understanding Credit & Debt
A Good Credit Score Can Make a Big Difference
Loan Rates May Vary Based on Your Credit Health
A top-notch credit score offers more than just bragging rights. It can translate into significant financial savings over a lifetime as you seek to finance everything from a house to a car to a small business.
A healthy credit score can, for example, yield a more affordable interest rate on a mortgage.
While different financial institutions measure your creditworthiness in different ways, one widely available assessment is your FICO® score. The better rates often go to borrowers with scores of at least 760, according to FICO.
Here's a hypothetical example that gives you an idea of how it might work. Let's say you've achieved that high score and want to apply for a 30-year, fixed-rate, $300,000 mortgage. FICO says the average national interest rate on that loan with a score of 760 or better is 3.56% as of May13. At that rate your monthly mortgage payment would be $1,358.
If your credit score was 100 points lower, then the average national interest rate on that same loan would be 4.18%, according to FICO. Monthly payments would come out to $1,463, an annual difference of more than $1,200, or a total difference of more than $37,000 over 30 years.
If your score is in the low 600's, FICO says the average national interest rate would be 5.15%. That would cost you $1,638 per month, or an additional $100,000 over 30 years, compared to what someone with a score of 760 or better would spend.
Credit scores may also influence how much you pay in interest if you carry a balance on a credit card.
If your score needs a boost, it's never too late to improve it. Not sure where to begin? The first step is to understand how a credit score works. Here are the five factors FICO says make up its scores:
- Payment History: At 35% of your score, this is the largest ingredient that makes up your score. This includes how well you pay your bills on time, whether you have any past due bills or bills in collection and whether you've declared bankruptcy.
- Amounts Owed: This accounts for 30% of your score and is also known as "credit utilization." It's the balances you're carrying on all your credit cards compared to the limit on all those cards. For example, if you're carrying a balance of $500 on one credit card and the limit on the card is $5,000, your "utilization" of that credit card is 10%. The lower your “amounts owed" or "utilization," the higher your credit score will usually be.
- Length of Credit History: This is 15% of your credit score and is based on the time your credit accounts have been open.
- New Credit: This is equal to 10% of your credit score and reflects the number of credit card and other loan accounts you've opened, as well as any inquiries made about your credit recently.
- Types of Credit Used: This is the final 10% of your credit score and takes into account the different types of credit on your file. Having a variety of types of credit can sometimes help boost your score.
Once you understand credit scores, consider specific steps that might improve yours. There are few sources out there that provide an overview. That's why I've decided to team up with Chase Slate as a financial education partner. They've just introduced a new Free FICO Score solution where Chase Slate customers receive not just their credit score, but also an overview of the reasons behind that number and helpful suggestions on how to manage their credit health.
If you stay dedicated to making the right moves, you should see improvements within three to 12 months. The wait will be worth it, since ultimately it can mean more money in your pocket.
Learn how Chase Slate can help you better understand your credit health.
The opinions stated are those of the author and are not necessarily the opinions of Chase.
FICO® is a registered trademark of the Fair Isaac Corporation in the United States and other countries.
Photo: iStock/Geber86 | Farnoosh Torabi is an award-winning journalist, author, television personality and personal finance expert who provides financial education for Chase Slate.