How Your Credit Score Affects You (and Your Wallet)

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Posted Sun, 08/23/2009 - 11:12 by admin
The use your credit score is no longer limited to banks and creditors making loan decisions or determining the terms and interest rate you will be charged on a loan. More often, credit scores are being used by a vaiety of of businesses including merchants, utility companies, phone companies, insurance companies, landlords, and even employers.

Credit scores are becoming more and more important in everyday life. They are used for as the qualifying data for a multitude of items from loans, to employment, to goods and services. Because credit scores play such an integral role, a consumer has some protection over what is posted. Federal law "The Fair Credit Reporting Act (FCRA)" requires a company to tell you if they have denied your application for credit, insurance, or employment based in whole or in part by your credit report.

In addition to determining if you qualify, credit scores are frequently used to calculate interest rates when borrowing money. This is where your credit score can make a huge difference—not only in monthly payments, but in the total amount that you must repay over the life of a loan.

Here are two examples:


Example #A - Home Mortgage (30 year fixed rate)
$200,000 Mortgage
Interest Rate Monthly Payment Total Amount Paid over 30 Years
High Score 5.847% $1180 $424,620
Average Score 6.353% $1245 $448,200
Low Score 10.844% $1881 $677,160


Example #B - Automobile Loan (48 month fixed rate)

$20,000 Automobile Loan
Interest Rate Monthly Payment Total Amount Paid over 4 Years
High Score 6.981% $479 $22,992
Average Score 9.270% $500 $24,000
Low Score 14.785% $554 $26,592



Remember that these are just examples. Most credit score models are split into more tiers, but it's easy to see how a low (or poor) credit score can add thousands—or hundreds of thousands of dollars to the amount you will pay over the life of a loan. Also keep in mind that a "high" score for an automobile loan may not be the same as a high score for a mortgage. In addition, remember; if your score is below the minimum requirement set by a lender, you probably won't qualify for the loan at all.

Understanding and monitoring your credit score (FICO) and credit history gives you leverage to negotiate the best rates on a loan. Checking your credit report and credit score well in advance of applying for a loan can help avoid surprises and give you time to correct errors or make improvements. To get your free credit report and score today go to GoFreeCredit, our preferred provider.