The days of traditional relationship banking are nearing an end. Sadly, instead of looking at the “big picture” of your financial situation, more banks are relying on FICO Scores as the primary indicator of your credit worthiness. In fact, a couple with no debt, a decent down payment, and a $100k income, could potentially be declined for a modest home loan application because their credit history is too thin.
Not only is a FICO Score used to determine your eligibility for a loan, it is also used to determine your interest rate. According to myfico.com a 150 point drop in your credit score can cost you nearly $3700 a year more in payments on a $150,000 30 year mortgage. That is over $110,000 more you’ll pay over the life of the loan, almost enough to buy another house!
The following information is provided courtesy of myfico.com to help explain how the credit score works, how to obtain your scores, and also how to estimate your scores if your just curious and don’t want to purchase your scores yet.
How FICO® Scores Work
When you apply for credit – whether for a credit card, a car loan, or a mortgage – lenders want to know what risk they’d take by loaning money to you.
FICO® scores are the credit scores most lenders use to determine your credit risk. You have three FICO® scores, one for each of the three credit bureaus – Experian, TransUnion, and Equifax. Each score is based on information the credit bureau keeps on file about you. As this information changes, your credit scores tend to change as well.
Your 3 FICO® scores affect both how much and what loan terms (interest rate, etc.) lenders will offer you at any given time.
Taking steps to get your FICO® scores in the higher ranges can help you qualify for better rates from lenders.
Higher FICO® Scores = Lower Payments
The higher your FICO® scores, the less you pay to buy on credit – no matter whether you’re getting a home loan, cell phone, a car loan, or signing up for credit cards.
For example, on a $150,000 30-year, fixed-rate mortgage:
As you can see, in the example above using today’s national rates, a person with FICO® scores of 760 or better will pay $308 less per month for a $150,000 30-year, fixed-rate mortgage than a person with FICO® scores below 620 — that’s a savings of $3,696 a year.
You can see how essential it is to get your scores in the higher ranges if they are low, and also how important it is to keep them high if they are good.
How To Get Your FICO Score
If you are considering financing a major purchase such as a new home, you would be well advised to purchase the FICO Credit Complete. For around $47, this product provides you with all three of your most recent credit reports, and credit scores from the three credit bureaus. This product will also allow you to run different scenarios to determine what actions, such as paying down a credit card balance, will do to you scores.
If you are curious about where your scores might be, try using this free FICO Score Estimator.
Don’t forget that you can get your 100% free credit reports HERE.
If your credit scores are lower than you would like, or if you need help disputing inaccuracies on your reports, I have found no greater resource on the Internet than CreditBoards.com. This active Internet message board has many members who have been in similar situations and built up their credit scores using tried and true techniques. Best of all, the site is free to join.
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