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Credit Score and Interest Rates

An Intro to Your Credit Score and Loan Interest Rates

How your credit score affects your interest rate could mean thousands of dollars to a home buyer over the life of a loan. Even if you’re just getting a credit card, over time the higher interest rate will take a huge chunk out of your wallet and make it difficult to save for larger-priced things like a car or house.

You Credit Score and a Potential Lender

For the lender, your credit score means the level of risk involved in lending money to you. Lenders have to look at more than your income to decide if you are worthy of them taking a chance on you. This is largely based on statistics of delinquency rates, which are charted like this:

 

Score
Population
Rate of Delinquency
300 to 499
1%
87%
500 to 549
5%
71%
550 to 599
7%
51%
600 to 649
11%
31%
650 to 699
16%
15%
700 to 749
20%
5%
749 to 799
29%
2%
800 and up
11%
1%

For the 700 and up scorers, there isn’t a lot of difference in the delinquency rates and they enjoy the best loans and interest rates. As the scores drop after 700, however, you can see how the risk increases—for the population from 600 to 649, for example, a 31% delinquency rate with 11% of the population means that for every 10,000 people they loan money to in this category, statistically 341 will have delinquencies. If that sounds like a lot, let’s move to the lowest group. Out of 10,000 loans to that group, 870 will fall behind on payments!





Lending and Credit Score Variations

If you were a lender, who would you want to lend to? Of course, the 700 and up group. If, however, you are a sub-prime lender, you may be in the business of creating and selling loan products to people in the lower scores. If so, you will still want your wallet covered—you would charge a higher interest rate to make up for the defaults.

A Low Credit Score and Your Lending Options

For this reason, people with low credit scores are often victims of predatory lenders. It’s sometimes attractive to take a high interest rate for the chance to have a house, but you may be better off taking the time to clean up your credit first so you can let time be your friend. When you have all your creditors paid and errors fixed, get a secured credit card and make all you payments on time. You can’t erase the past, but you can clean up your future.


  

  




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Latest News

7/15/10

Figures provided by FICO Inc. show that 25.5 percent of consumers — nearly 43.4 million people — now have a credit score of 599 or below, marking them as poor risks for lenders. It's unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use.

 

 

7/17/09

A Home Loan Modification could affect your credit score depending on how far behind you are and the kind of mortgage loan modification you’ll be granted.

 

 

7/8/09

In this recession, many consumers find their credit as the credit crunch continue to take its toll. Banks and credit-card companies hit by charge-offs are tightening up their lending standards.

 

 

6/15/09

As the recession drags on, more people find their all-important credit scores slipping. Here are some suggestions what you can do about it

 

 

6/10/09

Fair Isaac Corp., maker of the popular FICO credit score, is rolling out its new-and-improved scoring model, dubbed FICO 08, with Equifax.

 

 

5/19/09

Recently, many consumers have experienced their credit card company decreased their credit line. Card issuers are tightening the screws on consumers

 

 

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