A good credit score is always important, especially when you’re anticipating buying a house, car or other large purchase that requires financing. It’s even more important to have a good credit score now with the credit crunch we are currently going through. Banks are tightening lending due to the rising number of foreclosures and delinquencies which means they are getting pickier about who they lend money to. To make sure you continue to qualify for financing – and at the best rates possible – you must have good credit.
So, what is considered a good credit score? According to Fair Isaac, also known as FICO, a credit score above 700 is considered good, a score above 750 is considered great, and anything over 800 is considered excellent. FICO scores can range from 300 to 850. The national average is approximately 680 and only 13% of people have a score above 800.
A good credit score is important because it determines what interest rate you will get when you apply for a loan, or if you even qualify for that loan. In this credit crunch, many people that would have qualified for a mortgage or car loan a few years ago are no longer qualifying. For example, you used to be able to qualify for a mortgage with a score of 500, now some mortgage lenders are requiring a score of 620 or higher to even qualify for a mortgage loan. GMAC recently announced that you will need a score of 700 or higher to qualify for an auto loan.
Even if you do qualify for a loan, you may be paying a higher interest rate. Credit card companies are taking a closer look at your payment history and how much debt you have outstanding when determining whether to extend credit and at what rates. People who have the highest credit scores will get the lowest interest rates and the best terms. What interest rate you qualify for determines how much total you will pay for a loan.
To give you an example of how a higher score can save you money, let’s look at someone applying for a 30-year fixed mortgage of $ 300,000. Someone with a score of 680 would pay 6.586% or $ 1,913 per month. Someone with a score of 720 would pay 6.302% or $ 1,857 per month, while someone with 760 or higher would only pay 6.08% or $ 1,814 per month. So a lower credit score could cost you over $ 1,000 per year.
You can reduce the impact of the credit crunch by taking steps to improve your credit score, or by keeping it in good shape if you have a good score already.
The biggest factors that make up your score include your payment history, how much debt you’re carrying and how long your credit history is. The largest component of your credit score is your payment history.
Your payment history consists of:
* Whether you pay your bills on time or not
* How many times you’ve paid late
* How many times you’ve missed a payment
* How long an account was delinquent
* The number of late payments and/or delinquent accounts
* How long ago your late payment was
* Whether you’ve ever been turned over to a collection agency
* Whether you’ve ever filed for bankruptcy
Since your payment history makes up the largest part of your credit score, the best thing you can do to improve your score is to pay your bills on time.
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