Ignorance Is Not Bliss
Too many don’t know what their credit score means. A survey by the Consumer Federation of America showed that only one-third correctly understood that credit scores indicate the risk of not repaying a loan (which also means credit card debt).
Today, credit reports are used for purposes beyond borrowing. Everyone from utility companies, landlords, auto insurance companies even employers. The U.S. Public Interest Research Group found that an appalling 79% of reports had errors in them in 2004. On top of that, it found that 25% of the errors would have resulted in a denial of credit. That’s huge!
Having a low credit score means you pay more money in interest charges. How does that compute?
Consider this—if you had a FICO score (Fair, Issac & Company, MyFico.com) of 720 or above (excellent), a $150,000 30-year mortgage could have a 5.72% interest rate or $872 monthly payment. If your score is low, say 560, you will be looking at a 9.29% interest rate. The monthly payment will be $1,238 or a $4,400 annual difference in mortgage payments—that’s significant money!
Below is a 30-year $200,000 loan broken out with interest rates, interest paid, monthly payment, FICO score ranges and the increased amount you would have to pay when your FICO score is reduced.
Automotive and credit card loans work the same way. The higher the FICO score you have, the lower the interest rate you will be charged. The easiest way to increase your FICO score is to pay your bills on time and reduce outstanding balances.
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