Do you understand what a credit score actually measures? Do you know what a good score is? What’s the best way to improve your credit score?
The Consumer Federation of America reports that most consumers do not fully comprehend how these mysterious three-digit ratings are used.
Those of us who have purchased a home know that mortgage lenders utilize these numbers to determine risk; how risky it is for them to lend us money. But only a minority of consumers are aware that electric utilities, home insurers and landlords frequently use credit scores to decide whether to sell us a service and at what price.
Let’s look at this FICO score-driven mortgage loan pricing scenario…
According to Fair Isaac, the company that guards their FICO credit score formula more closely than Coca-Cola guards its soft drink recipe, a homebuyer with a 720 credit score would be charged 5.72% on a thirty year fixed rate mortgage. That would result in monthly principal and interest payments of about $868.00.
Borrowers with a FICO score lower than 600 would be charged a 9.29% interest rate with monthly (principal and interest) payments of about $1,229.00, assuming they were able to qualify for the loan.
The annual difference in mortgage payments is a whopping four thousand three hundred thirty two dollars! ($1,229.00 - $868.00 X 12 months)
As you are reading this, do you see why it’s so important to maintain a high credit score?
Here are five facts to consider:
1. These numbers reflect past credit history, not personal characteristics such as age and gender. Over time you can control these scores with borrowing and repayment behavior.
2. A low score could not only cost you thousands of dollars in additional finance charges, you could be denied access to credit, insurance, electric and phone service, an apartment and even a job.
3. Borrowers with scores under 600 are typically charged higher ‘sub-prime’ loan rates, while those with scores above 700 are usually charged lower rates.
4. To improve your credit score: pay your bills on time, don’t max out your credit cards or other revolving lines of credit, pay off debt rather than transferring it to different credit cards and don’t open many new accounts in succession.
5. Check your credit report at least once a year to make sure it is error free and no one else is using your personal finance information.
Own the power of your personal finances and retire a millionaire!
Marc Woolf
Blog Posts Copyright © Marc S. Woolf 2007 All rights reserved.
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