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What’s a good credit score and what rates do you get?

Credit score is emphasized in society as being very important.  Since credit bureaus started computing credit scores that credit card companies and lenders use to determine the chances of you paying back a debt, those scores have been used to make judgments about their owners.  Scores are compiled through a formula that outputs a three digit number between 300 and 850.  This number becomes your credit score.  Several factors like the length of your credit history, missed payments and credit diversity play a role in determining your credit score.

On this scale of 350 to 800 a good score is considered to be anything over 720.  At this score you can expect to be approved for most loans at a very good interest rate and have some negotiating leverage.  An excellent score is considered to be anything over 740.  At this score you basically hold the ball in your court and can expect to get a loan with the best terms and interest rates.  A decent credit score is 680-720.  At this range you can expect to talk to banks about loans with confidence but may not get the best terms.  An average score is 620-680, here you will less likely to get much of a loan without a co-signer and the interest will most likely be high.  A poor score is 560-619 and you have little chance of getting a loan.  Bad credit is considered to be anything below 559 and you will likely need help to rebuild your credit.

According to as of 12/6/2012 the national average interest rate on a 30 year mortgage for someone who has a credit score of 760-850 is 2.889 percent.  The average interest rate for someone with a score of 700-759 is 3.111 percent.  The average interest of someone with a credit score of 680-699 is 3.288 percent.  The average interest rate of someone with a credit score of 660-679 is 3.502 percent.  Someone with a credit score of 640-659 will pay a 3.932 interest rate.  Finally someone with a bad credit score of 620-639 will end up paying 4.478 percent, or 1.59 percent higher than someone with excellent credit.

This means that if you go from an average score of 620-679 to the 680-699 range, you could save 5,000 dollars in interest payments on a 30 year mortgage for a home that costs 200,000 dollars.  That’s what a few points can do for you, or in some cases cost you.  Having this credit information allows you to get an inside look at how credit works.  Arm yourself with knowledge so you pay attention to it.  Most people don’t like to think about it because they believe it is hard to understand.  This is the thinking that costs people thousands every time they make a large purchase.

You can improve your credit by working on the factors that influence the credit score formula.  For example, if you try to get new credit more than 6 times in 6 months, your score will drop about 50 points, that puts you in the next credit bracket down and you have lost the 5,000 dollars over the life of your house loan.  If you lose 100 points it could cost you 10,000 dollars and so on.

By keeping track of your credit now and knowing what actions affect what part of your credit, you are arming yourself with education.  People educated about credit spend thousands less on loan terms compared to people who avoid it.  Do not be the person who thinks a few interest points won’t add up, they do add up, to thousands!