How Much do High Interest Rates Cost You?
Everyone who has ever been exposed to advertising has seen a car commercial, furniture commercial or some other pitch to buy something on credit. Normally there’s a freeze image of a payment, and beneath that payment is several lines of indecipherable type you are supposed to read. The pitch person also mentions something about “on approved credit” for you to get the advertised rate.
On approved credit means that you need to meet certain criteria for the advertised rate to apply to you. Normally, to get the best rates, you need to have a credit score above 720.
Credit scores are determined in bands, or tiers. A common tier layout looks like this:
◦ 330-619 Poor Credit
◦ 620-659 Fair Credit
◦ 660-720 Average Credit
◦ 721-750 Good Credit
◦ Above 750 Excellent Credit
In working to improve your credit score, understand that moving within a tier, for example from 660 to 680, is not going to have much impact on the interest rate you receive. Moving from tier to tier, for example from 680 to 721, will impact the interest rate you pay.
But how important is a good credit score over the life of a loan? The answer is it is worth thousands of dollars. Consider a $729,500 value (the current maximum FHA amount in Southern California) for a 30 year fixed rate mortgage. This mortgage is not available to people with credit scores below 620 due to underwriting regulations, but take a look at the additional interest charged between “barely qualifying” with a 620 score and the “excellent” credit of 760:
Score APR Payment Payment Difference
760-850 3.998 $3479 -0-
700-759 4.211 $3573 $33,840
680-699 4.389 $3650 $61,650
660-679 4.603 $3742 $94,680
640-659 5.035 $3933 $163,440
620-639 5.583 $4182 $253,080
Over the life of the loan, the difference is over a quarter-million dollars. Think working to improve your credit score is worth the time and money investment?
To a lesser extent, the same principals work for car payments as well. It took a little digging, but we discovered the value of a car loan nationally is $26,700, and that money is now financed over 60 months. Based on these figures, the financing difference is shown in the following chart:
Score APR Payment Payment Difference
760-850 4.229 $493 -0-
700-759 5.805 $512 $1140
680-699 7.954 $539 $2760
660-679 10.989 $578 $5100
640-659 16.043 $647 $9240
620-639 17.061 $670 $10,620
Even over the term of this loan, a low score will cost the consumer an additional $10,000 plus.
There is no magic and no hidden secrets to improving your credit score. It just takes time and discipline on your part, and some persistence on the part of the person attempting the credit improvement.
If you are looking to re-enter the credit market, and your score is not what it should be, contact us today for an evaluation. We will tell you if we can help you or not, and if we can, approximately how long it will take. Let’s see what can be done to improve your scores today!
