General Breakdown of Your FICO Score
Credit score used by lenders to calculate the risk of lending money. It’s a tool to help creditors determine how likely you are to repay their loan. Most of the major credit agencies in the United States use the FICO score to evaluate your credit health. Your FICO score normally ranges between 300 and 850. So, what’s a good credit score? While each creditor may have their own calculation, generally the following breakdown applies.
- A FICO score under 630 is considered as Poor Credits
- An average or Fair score is between 630 and 690
- Good Score is between 690 and 720
- An excellent score is anything above 720
You’d be surprised how many people contact me with no understanding of what their credit score is. One customer, we’ll call him Tom, was convinced he was being haunted by the ghosts of his past. He couldn’t figure out why people kept rejecting him. Tom tried burning sage around his house to purge the spirits, but what he really needed was sage advice.
How Do you Rate?
Before you can change your credit rating, you need to understand what it is. Your FICO credit score, created by the Fair Isaac Corporation, is used by lenders, creditors, landlords, and even employers to assess your credit risk.
FICO scores range between 300 and 850. The criteria for a good credit depends on what you’re applying for. Although 650 isn’t necessarily bad credit, it won’t be enough for a high-end condo rental or mortgage. It also depends on where you live.
In cities like Boston, MA; San Francisco, CA; Seattle, WA; Minneapolis, MN; and Philadelphia, PA, the average credit score of renters is over 700. But in cities like Greenwood, MS; Albany, GA; Laredo, TX; or Riverside, CA, the average credit score is below 650.
Your FICO Score Component
Your credit score is based on a secret algorithm designed by FICO, originally Fair, Isaac and Company. The details of this algorithm are still hidden under a veil of secrecy even today. Though we do know the formula is generally comprised of the following five components or factors.
• Most Important factors – 35% Payment History
• Very Important factors – 30% Credit Utilization
• Somewhat important – 15% Length of Credit History
• Somewhat important – 10% Credit Inquiries
• Less Important factors – 10% Type of Credit Used
Why a good credit Score is one of the most important factors?
Your credit score is one of the most important factors landlords use when deciding whether to rent to tenants. Here’s a chart showing the cities with the highest credit scores in the country, so you know what you’re competing against.
Experian recently released a study showing credit scores for new and used car buyers. The average recipient of a new-car loan has a 713 credit score, while the used-car loan average was 656.
Approximately 20 percent of borrowers got a car loan with credit scores below 600 and 5 percent had credit scores below 500. While people with these low credit scores were able to secure a car loan, they paid a lot more for it. So it’s very important to understand your credit score before applying for any loan or mortgages.
Borrowers with good credit typically only must pay $1000 or 10 percent of the selling price for a down payment. With bad credit, this doubles to 20 percent or more, and that’s not all. Here’s a breakdown of how credit scores affect the interest rates for car loans.
As you can see, a credit score of 700 will get you an annual percentage rate (APR) of 4.16-5.68 percent. Meanwhile, a 600 credit score nearly triples that APR. I bet you didn’t realize your credit score was costing you so much.
Let’s say you get an auto loan for $10,000 for five years. With a 4.16 percent APR, you’ll pay a total of $11,204.22, assuming you’re never late with a payment. At 16.92 percent, you pay $15,034.61 by the end of your loan. Even with a higher down payment, you’ll end up with higher monthly payments and pay nearly 40 percent more by the end of your loan.
Mortgages have even higher credit requirements!
You need a credit score of at least 740 to qualify for the best loans with the lowest down payment requirements (20 percent) and interest rates. Many lenders will qualify you for a conventional mortgage at 700, and some will even finance you as low as 620, although this is easier with VA– or USDA-backed loans.
Once your credit score drops below 580, your best bet for a mortgage is the Federal Housing Administration (FHA), but you’ll need a down payment of 10 percent. That’s much better than the 20 percent or more needed on a conventional loan. Although with an FHA loan, you’ll need more PMI.
It will also affect mortgage interest rates. A FICO score of 700 can get you a 4.49 percent APR, whereas a 620 score comes with a 5.857 percent APR. Over the course of a 30-year mortgage, that’s a difference of $60,000 on a $200,000 home.Of course, mortgage rates are always changing. As of August 2018, the average APR is 4.57 percent.
Here’s a chart showing the difference your credit score makes.
So not only does a bad credit score require higher deposits and down payments, it increases monthly payments and total loan repayment amounts. That’s why it’s important to maintain a good credit score. Bad credit will come back to haunt you when you try to buy your dream home or a new car.