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Low Credit
Scores Can Cost Consumers…More Than Once
Do you know what a credit score is? Do you know what
your credit score is and how it is calculated? Do
you know what your score means to your overall
financial picture; including interest rates,
insurance premiums, and even your job application?
Providence Mortgage has prepared this information to
help you remember the answers to these questions so
you can use credit responsibly and make the most of
your credit score.
What is a
credit score?
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Fair Isaac Corporation, FICO,
developed a credit scoring model which allows
the information in a credit report to be
summarized into a three-digit number or credit
score.
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Credit scores, or FICO scores,
generally range from 300 to 850.
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Low score generally means a
borrower is a poor credit risk so the lender
charges a higher interest rate.
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High score generally means a
borrower is a good credit risk so the lender
charges a lower interest rate.
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The three major credit
bureaus-Equifax, TransUnion, & Experian-each
call the score by different names, respectively:
BeaconŽ; EmpiricaŽ; and Experian/Fair, Isaac
Risk Model.
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Many lenders, creditors,
insurance companies, and even employers use
these scores to help them make a determination
about the consumer.
How is my credit score
calculated?
Credit scores are based on five
different areas:
How does my credit score affect the interest rate
I receive from creditors or lenders?
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Generally, the higher your
credit score, the lower the interest rate and
vice versa
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Consider the impact of a credit
score on the purchase of a home (or a car, boat,
or even a refinance). In the example show below,
each consumer could afford a monthly mortgage
payment of $1238.25. The only difference is that
each consumer has a different credit score which
translates into different interest rates.
Comparing the difference between the consumer
with the highest credit score and the consumer
with the lowest credit score. By using credit
responsibly the consumer with the high credit
score in this example could purchase a home
worth $68,373 more than the consumer with the
lowest credit score. (Because interest rates
fluctuate, this example is for illustration
purposes only and does not mean that consumers
with these credit scores would be offered the
corresponding interest rates.)
VS
|
Loan Amount |
# of Months |
Credit Score |
Interest Rate |
Monthly
Payment |
Total
Repayment |
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$218,373 |
360 |
720-850 |
5.49% |
($1,238.25) |
($445,771.69) |
|
$215,386 |
360 |
700-719 |
5.61% |
($1,238.25) |
($445,771.69) |
|
$203,228 |
360 |
675-699 |
6.15% |
($1,238.25) |
($445,771.69) |
|
$180,599 |
360 |
620-674 |
7.30% |
($1,238.25) |
($445,771.69) |
|
$160,580 |
360 |
560-619 |
8.53% |
($1,238.25) |
($445,771.69) |
|
$150,000 |
360 |
500-559 |
9.29% |
($1,238.25) |
($445,771.69) |
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An added benefit from being able
to purchase a more expensive home because of
good credit might be more appreciation. For
example, if the two homes above both appreciated
at 5% in one year, the $150,000 home would be
worth $157,500 or an increase of $7,500. In
contrast, the $218,373 home would be worth
$229,291 or an increase of $10,918. The
difference in appreciation for one year is
almost $3,500 and represents another possible
benefit of maintaining good credit.
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Another way of looking at it is
that the person with the credit score between
720 and 850 could buy the $150,000 home and have
a monthly payment of $850.74. The difference
between this payment and the payment for a
credit score of 500-559 is $387.51 each month.
That is quite a big difference simply for
maintaining a good credit score. How would you
use an extra $387.51 each month?
How might some of my insurance
coverage & premiums be affected by my credit score?
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"Almost all auto insurers-92 of
100 polled in a recent survey by the research
firm Conning & Co.-and an increasing number of
companies writing homeowners insurance are now
using credit information to decide whether to
issue a policy on your car and/or home."
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Sometimes the credit information
is also used to set the premium.
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Clarence Smith, former assistant
vice president at Conning and Co., reported that
consumers with bad credit are going to pay 20 to
50 percent more in auto insurance premiums than
consumers who have good credit.
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"Ironically, someone with a
flawed driving record but a clean credit record
could pay less for auto insurance than someone
with a spotless driving record but a spotty
credit record."
How might my job application be
affected by my credit score?
How can I learn more about credit
scores?
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Visit
www.bankrate.com/brm/fico/calc.asp to
estimate your FICOŽ score.
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Visit
www.myfico.com to view actual interest
rates, updated daily, that correspond to ranges
of credit scores (located on lower, left-hand
column).
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For more information, please
contact one of Providence's Loan Originators @
1.262.658.9000.
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