A credit score is a vital part of your borrowing status. It measures the likelihood of a consumer being 90 days late or more on any loan payment over the next two years. There are three credit bureaus that give scores to consumers: TransUnion, Experian and Equifax. These three bureaus all report to the Fair Isaac Corporation (FICO), which also gives credit scores. FICO classic score is the more important one, because mortgage brokers and many other lenders prefer it as a standard. FICO scores range from 350 to 800 – higher being more beneficial to the consumer.

How does this work?

The risk that a creditor takes in lending someone with a lower score is fixed to the interest rates as a financing fee creating higher overall interest rates, monthly payments and more money spent over the length of a loan. A high FICO score generates lower interest rates because the risk involved is low.

What does this mean?

Ideally, consumers want to strive toward that 800 so as to lower their interest rates and save thousands of dollars in financing fees and extra interest. A score that high, however, is rare. Only one in 1,300 people in the US have a score of 800 or above, a stark contrast with one in eight people with scores between 500 and 600. These consumers could face not qualifying for loans and incredibly high interest rates up to 8.5% to 10% or more.

How much can be saved?

Increasing FICO scores could save a person hundreds of thousands of dollars depending on the initial cost of the loan. For example if I wanted to buy a house for $350,000 with a FICO score of 640, I might be approved for an interest rate of 7.415% on a 30-year fixed rate loan. My monthly payments would then be $2,426.91. Now if I increased my score 60 points to 700, my monthly payment would drop to $2,171.2. I would save $92,056.91 in fees and interest over the life of the loan.

Credit scores are vital to consumers and maintaining good credit can save you lots of money. They affect each and every one of us, especially if we want to buy a house, a car, or any large purchase that would require a loan for most of us. If you feel your rates are too high, they probably are and you should considering looking at the health of your credit score. Credit bureaus make mistakes and it is possible that you could be paying for mistakes made on your record, quite literally!

Brought to you by Financial Solution Services' Research & Development Team