Financial Impact of Your Fico Credit Score

It's amazing how much a number can impact your finances. In the case of your fico credit score, you're looking at a number that can literally save or cost you tens of thousands of dollars over your lifetime.

That's because this country's financial community uses the fico credit score ("fico" being shorthand for Fair, Isaac & Co.,) to decide whether you are creditworthy. The fico credit score models predict the rate of default for each score range. For example, at scores below 499, as many as 87% are likely to default; above 700, only 5% or fewer will default. You can bet that as your score drops below 600, you'll likely be in the category of bad credit loans (see bad credit personal loans, bad credit auto loans, or bad credit credit cards for more information).

Does your fico credit score help or hurt?

Credit isn't just a "yes" or "no" decision these days. Since lenders know the default rate for each score range, they can figure out what to charge in interest rates & fees to cover their losses.

In one way, the system has helped millions of consumers get the goods & services they want, especially homes, that they might have been locked out of 30 years ago. It also has improved non-discriminatory lending practices, as borrowers are judged on their past credit behavior rather than their race, gender, age or other irrelevant quality.

Despite the system's good points, there are problems. The biggest is when your fico credit score is based on mistakes in your credit file, or on your not knowing how your Fico score works, causing you to do things that drop your score unnecessarily. If a credit report mistake drops your score 20 points and you don't know it, you'll face unfairly higher costs across the board. In general, if you don't pay attention to your fico credit score, you'll probably pay for it.

How much does a low fico credit score cost?

• 1% of interest rate adds over $35,000 to the cost of your home loan over 30 years.
• The same 1% interest rate difference makes you pay $100 more each month for 30 years.
• Lower scores cause lenders to charge more points and often, private mortgage insurance.
• At certain score levels, your ability to get a low or no-down payment loan goes away; therefore a lower score can force you to come up with thousands of dollars of down payment cash you wouldn't otherwise need.
• You'll pay higher home refinance costs and more for equity lines of credit.
• You'll wind up with higher auto loan costs.
• You'll even pay higher auto insurance premiums. (Yes, it's controversial for auto insurance companies to base your rates on a credit score along with your driving record.)
• You'll pay higher Visa, MasterCard & other revolving account rates.
• You'll get charged higher store card & gas card rates.

Clearly, you'll save money when you know how to keep your credit scores high. Make sure you get a free credit report and begin optimizing your scores. It's harder to find a free fico score, but even if you have to pay for it, the cost is well worth it.