To get credit where credit is due, focus on your credit score. Your credit score, or FICO score, named for the company that created the concept, partly determines what you pay for your mortgage, your car loan, your credit cards and even your cable and utility bills. FICO scores range from 350 to 850. The median U.S. score was 723 as of 2011. The difference between a good and excellent score can mean thousands of dollars over a loan's life.
An excellent credit score ranges from 750 to 850, according to FICO. If you’re in this group, your score is well above the U.S. average and tells lenders you’re an exceptional borrower. A score above 800 is particularly strong. Scoring categories include payment history, balances owed, length of credit history, how much new credit you have and whether you have diverse credit types.
A FICO score of 725 to 759 means you have very good credit. With very good credit, your score is above average and identifies you as a dependable borrower. A good score of 660 to 724 is near average; if that’s your number, most lenders consider you a solid borrower.
The difference between excellent and good credit is clear on loan statements. Consider the interest on a $200,000, 30-year, fixed-rate mortgage. With a credit score of 760 to 850, you’d qualify for an interest rate of 3.083 percent as of October 2012, according to FICO’s interest calculator. Your monthly payment would be $852, and you’d pay interest of $106,787 over the loan’s life. Slip into the good category, at 660, and your interest rate would tick up to 3.696 percent. Your monthly payment would be $920, and you’d fork over $131,241 in interest. Without excellent credit, some loans may be off-limits: If you want a stated-income loan for which you don’t have to prove wages, you need a score of at least 680.
The credit score difference is also noticeable when you buy a car. With a FICO score of 720 or more, a 36-month, $20,000 loan for a new car would come with an interest rate of 3.511 percent, a $586 monthly installment and $1,101 in interest payments. A score of 660 would more than double your interest rate, to 7.018 percent. You’d pay $618 a month, and interest would cost you $2,237 over the three-year borrowing period.
You can move your score from good to excellent in time. Start with payment history, which makes up the biggest share of your score, at 35 percent. Put bills on auto-pay to avoid late payments. The amount you owe to creditors is the second-biggest scoring category, at 30 percent. If you owe too much compared with your income, that’ll hurt your borrowing prospects. Set up a budget and put as much discretionary cash as possible toward paying down debt. Aside from letting time pass, you can’t do much about a credit history that isn’t deep enough. To avoid dings over new credit, don’t apply for fresh plastic or a car loan while you’re closing on a house. If you open too much new credit at once to build credit history or diversify your accounts, you could scare off bankers.
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