Why raise your Fico score?
Your Fico score, in a nutshell, determines your attractiveness as a borrower. The higher your Fico score is, the harder lenders will work to get your business. Likewise, the lower your Fico score, the harder you’ll have to work to get lenders to trust you with their money. A couple of years ago, I had a Fico score of 510, meaning that most lenders figured they were more likely to make a return on their money by drinking a bottle of bourbon and heading down to the track.
Simply put, that little number indicated to potential lenders that, statistically speaking, there was a high chance I’d default on a loan. Really high. In industry jargon, I was a ‘bad credit risk’. This means that lenders were very nervous (to say the least!) about lending me money, particularly if it was an ‘unsecured loan’ like a credit card. The interest rates they offered me would have made Tony Soprano blush.
Oh how I loathed the banks back then!
Of course I now know it was nothing personal, just the cold, impartial laws of economics at work. Basically my Fico score told potential lenders that they couldn’t reasonably expect to make any money if they offered me a ‘fair’ rate. To make the higher than average risk of me defaulting worth their while, they demanded a higher than average return. Econ 101.
Below is a table from the Fair Isaac Corporation (FICO) showing the current relationship between Fico Scores and Interest Rates on 30 year fixed mortgages.
Fico Score Interest Rate
500-559 12.985 %
560-619 12.018 %
620-674 7.658 %
675-699 6.508 %
700-719 5.970 %
720-850 5.845 %
Note that there is more than a 7% difference between the highest and lowest rates. On a $350,000 mortgage repaid monthly, the difference in interest charges over the life of the loan is nearly $700,000!
Even a tiny increase in your Fico score could mean many thousands of dollars in savings over the long run.
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