There is a BIG difference between bad and good credit

Offered the opportunity, would you give yourself a raise? You could do it and you don’t even need to ask your boss for permission.

Just pay more attention to improving your credit score and see how quickly it affects your bank account.

At the low end, you will bank thousands of dollars by raising your score. At the high end, if you upgrade from a poor to excellent score, you could save hundreds of thousands of dollars!

“That’s the thing, too many people don’t realize the impact credit scores have on the financial contracts and services they use throughout their lives,” Anna Lusardi, distinguished scholar and professor of economics at George Washington University said. “Improving your credit score enough so you get a 1% better rate on your mortgage saves thousands over the life of the mortgage.

“Knowing your credit scores – and how to improve it – is one of the most important things you can do to improve your financial life.”

Credit scores are the great mystery of American finance because while most consumers have heard of them, few understand just how much financial clout a good credit score carries.

And what a wallop to your wallet a bad credit score is!

Almost one-third of the 220 million Americans with a credit score, fall into what is considered the “poor score” category. That means 68 million people with a score of less than 600 on a scale of 300 to 850. By comparison, 22% are in the “excellent” category, which is 780 or higher.

The difference? Someone in the poor credit score category often will pay 50% or more to borrow the same amount of money as someone in the excellent category.

“Bar none, credit scores are the most influential factor in getting competitively priced credit,” credit expert John Ulzheimer, a former employee at FICO and Experian credit bureaus, said. “If you’ve got solid scores – 750 or higher – lenders will be falling over themselves to offer you great deals on loans and credit card products.

“If you have lower scores, it means fewer and more expensive options.”

Does Your Credit Score Impact Your Life?

Understand your credit score, how it impacts your life and what you can do to help raise it.

Definition of a Credit Score

Credit scores are a measure of the likelihood you will repay a loan. They are based on several factors, most notably your credit history and reliability for making on-time payments. The information is fed into a very complex computer algorithm that calculates a number of variables and produces a 3-digit number that ranges between 300 and 850.

Businesses use credit scores to help determine the interest rate you’ll pay for mortgages, auto loans, credit cards and insurance and whether you even qualify for those financial necessities. Your score changes slightly, depending on the variables used by a particular business. For example, your mortgage credit score will not be the exact same as your score for an auto loan because a bank lending money for a home has different criteria than an auto dealership lending money for a car.

That’s why it pays to know more about a credit score and the factors that make it go up or down. Here is how it actually plays out in the four major areas – mortgages, auto loans, credit cards and insurance – where credit scores really impact your bottom line.

Credit Scores, Home Mortgages and Apartments

The National Association of Realtors (NAR) says that the average consumer will purchase between three and four homes during their lifetime. The cost of getting started has gone up steadily – way up, in most cases – so having a good credit score is crucial, no matter whether it’s your first or fourth home.

In 1970, the average starter home had three bedrooms, two baths and cost around $30,000. A starter home today will cost about $170,000, according to the NAR. The median sales price for a single-family home in August of 2016 was $242,000.

The higher your credit score, the better your interest rate for a mortgage. The national average credit score in August of 2016 was 695, while the average score for a homebuyer was 728.

If you take the average homebuyer’s credit score of 728 and match it against a home buyer with a “poor” credit score, consider the difference on a conventional, 30-year mortgage where you borrow $150,000.

Someone with a 728 credit score qualifies for a 3.4% interest rate and pays $89,479 of interest over 30 years. Someone with a 620 credit score, considered the drop off point in the mortgage industry, would pay at least 4.8% and $133,319 in interest for borrowing the same amount.

That’s a difference of $43,840 over the life of the loan. The NAR says the typical family moves every seven or eight years, so it’s easy to see how just a 100-point change in your credit score can end up costing (or saving!) you more than $100,000 as you buy more houses.

“Credit scores are a huge factor in determining the risk a lender is willing to take,” Fred Kreger, President of the Association of Mortgage Professionals said. “We want to give you the best rate we can because we want repeat customers.

“We’re looking to be your partners, but if I’m essentially going to write you a check to buy a home, I need to be able to trust you. Credit scores help me build that trust.”

Credit scores also help determine whether you qualify for the mortgage at all. People with less than a 620 credit score will find it very difficult to find a lender. At the opposite end, a 760 credit score or higher will get the best rates available.

That means homebuyers, especially those from the Millennial generation, which is putting off buying their first home until later in life, better have a good handle on their credit score when they ask a bank or credit union for a mortgage.

And let’s not forget about renting. Apartments often require larger deposits for renters with poor credit. If your score is too low, you might not even qualify for a lease.

Credit Scores and Auto Loans

People aren’t buying as many new cars as they used to, but they’re still buying more than enough for credit scores to save (or cost) them a lot of money.

American consumers bought a record 17.5 million vehicles in 2015. Though numbers are expected to fall in 2017, it’s only a 1-3% drop. The more significant decline is the average number of cars purchased in a lifetime, which has dropped from 13 in 2007 to 10 in 2016.

One thing that isn’t going down is the cost of a new car. The average selling price of a car in 2016 was $33,666, according to Kelley Blue Book.

If a consumer with a credit score over 720 borrows $30,000 for a car, he will pay 3.4% on a five-year loan or about $2,667 of interest. Someone with a credit score under 620 will pay 13.9% and $11,785 in interest over 60 months.

That is a difference of $9,118 or about 342% more, just for having a credit score difference of 100 points!

If you multiply that number by the nine cars the average consumer purchases in a lifetime, it’s costing the consumer with a poor credit score at least $82,000 for not paying attention to their credit score.

Credit Cards and Credit Scores

That gushing sound coming from your mailbox these days probably is the flood of credit card company offers flowing in from all directions.

The average American with a credit card already owns 3.7 of them, but banks and card companies obviously don’t think that’s enough. They are offering incentives like cash back, airline and hotel rewards, 0% balance transfers and other things to entice you to add at least one more card to your wallet.

Some cards are even offering access to free credit scores every month, which is something you definitely should look into “… but do it before you sign up for a card,” said Sean McQuay, credit and banking expert for Nerd Wallet.

“There are some really cool rewards programs out there, but in most cases you’re going to need at least a 720 credit score to get them,” added McQuay, whose company studies and rates the credit card industry very closely. “You could get a card with a score down in the 600s and maybe below, but to qualify for the best rewards programs, you’re going to need a really good credit score.”

Credit scores that are considered average or even poor by mortgage and auto loan standards, are still considered good enough to get a credit card. The problem starts when people with a low credit score can’t make the monthly payments and are hit with interest rates that start at 22% and quickly get to 30% when payments come in late.

The average credit card debt for American households in July of 2016 was $7,943. If you had a poor credit score (629 or below) and paid 22% interest (average rate available for poor credit scores in 2016) on $7,943, you would owe $143.63 in interest alone at the end of the month.

Compare that to someone with an excellent credit score (720 or above), who is paying 8.25% (best rate available from a bank in 2016) on the same amount. The interest on that debt would be just $53.86.

Thus, a 90-point difference in your credit score means at least an $89.77 difference every month (at least $1,077 over the course of a year) in how much you owe on a credit card.

“A good credit score limits how expensive your interest rate and debt are going to be,” McQuay said. “It also determines what type of products you qualify for, whether it be credit cards or mortgages or other types of loans. It’s going to be a hugely important part of your life.”

Insurance Rates and Credit Scores

Insurance rates are based on probability and the probability is your credit score has more to do more with the premiums you’re paying for home and auto insurance than any other factor.

That might explain why home owners who never have filed a claim, could be paying higher rates than the neighbor who got his roof replaced last year when a tree crashed onto it.

It also will solve the mystery of how your auto insurance rates are higher than your brother-in-law when you’ve never had an accident or ticket and he’s had one or both!

“A credit score indicates a person’s self-discipline to pay their bills on time,” John Connelly, Director at HUB International Insurance Agency, said. “People with good credit scores tend to follow rules, value their personal assets like a car or home and have proven to be better risks over time for insurance companies.

“Not everyone is like that,” Connelly added, “but since insurance companies deal on probability and history says the probability is high that people with a good credit score are better risks for insurance companies.”

The insurance industry guards very closely the formulas used to determine auto and homeowner rates.  There is no industry-based chart or survey that reveals the differences between poor, average and excellent credit scores, but outside studies say it is dramatic.

A Consumer Reports study in 2015 suggested that drivers with just good credit scores would see their rates double over what a driver with an excellent score would pay if both parties received a moving violation. Someone in the same situation with a poor credit score might see their insurance rates go up as much as 1000%!

Though there are a lot of factors that figure into determining your annual home and car insurance, Connelly doesn’t dispute that improving your credit score is almost a sure-fire way to improve your rates.

“Remember, we’re dealing in probability and it’s just a statistical fact that someone with a low credit score is more likely to get in an accident or file a claim,” Connelly said. “There have been instances when insurance company underwriters have elected to ease the standards because competition for customers got really heavy, but over time, that choice always came back to burn them.”

Your Credit Score and Employment

A bad credit score could keep you from getting a job, especially in the financial industry. Companies look for dependable, trustworthy employees. Employers might view a poor credit score as a warning that indicates irresponsibility.

Employers must get the applicant’s permission to check the score. You don’t have to grant it, but not doing so probably won’t help your chances of getting hired.


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