By Ryan Levin on October 16, 2011
.jpg.aspx?width=75&height=75) If you’ve ever tried to take out a loan, you already know that you have a credit score, a number that banks and other lenders can see and use to determine whether or not to lend you money. The better your credit score, the more trustworthy you appear to lenders, and likelier you are to get better rates on credit cards, mortgages, and auto loans. But what is a good credit score? How much will raising your credit score help you? Is there a line that separates a “good” credit score from a “bad” one?
Credit scores range from 300 to 850, but most scores (76%) fall within the 600-800 range, and nearly all of them (94%) are included in the 550-850 range.1
For many lenders, a credit score of 620 is considered the minimum requirement to be eligible for a loan.2 Lower than that, and the risk of defaulting becomes too high for lenders to stomach—statistically over 50%.1
In fact, the number 620 as a threshold is so common that it has its own vocabulary associated with it: loans available only to people with a credit score above 620 are called “prime” loans, while loans available to those with lower credit scores are called “subprime”.3 Prime loans typically have much lower interest rates than subprime loans, which carry a higher risk of default to lenders.
An exception is auto loans, which are often available at more or less reasonable rates to credit scores as low as 500.2
On the other end of the spectrum, 760 is considered effectively the same as the best credit score—anything at or above 760 is eligible for the very best rates lenders have to offer.4
In between 620 and 760, the quality of your credit score is a matter of degrees. 700 and higher is still considered quite good, while mid- to upper-600s can subject you to decent but less favorable interest rates.4
For example, if you take out a 30-year, fixed-rate loan for 200,000 dollars with a credit score of 650, you’ll end up paying, on average, $177,500 in interest by the time your loan matures. If you take out the same loan with a credit score of 675, you’ll pay about $150,000 and save $27,500—almost 14% of the principal amount.2
The numbers for other types of loans are similar. On a 48-month used auto loan of $10,000, a credit score of 650 lands you $3,400 worth of interest, 675 gets you $2,270, and 700 can bring your total interest payments down to $1,775.
You can use the calculator at http://www.myfico.com/myfico/creditcentral/loanrates.aspx to determine how much you’re likely to pay with your credit score. The bottom line is that keeping your credit score above 620 is extremely desirable and even necessary for most loans, and going up from there only helps.
References:
1 http://www.scoretruth.com/basics/statistical.php
2 http://www.myfico.com/myfico/creditcentral/loanrates.aspx
3 http://www.investopedia.com/terms/s/subprimeloan.asp#axzz1Xw8bDiyg
4 http://www.creditscoring.com/pages/bar.htm |