Most everyone understands that their credit rating is quite important when it comes to
getting a car loan or mortgage. However, are you aware that your credit score can have
a huge impact on the cost of those loans and can affect other aspects of your finances
as well?
Your credit report can be obtained free, annually, from each of the three major credit
bureaus: TRW (Experian), Equifax and Trans-Union. Obtaining your credit score may or
may not cost you a small fee. A number of services can be found online that will give
you free reports from all three credit bureaus. Some of these services also typically
offer a free credit report (including your credit score) that requires that you sign up for a
credit-reporting service that must be cancelled within a specified number of days or you
will be charged for the service. This is one way to obtain your credit score (also called a
FICO score) for free. . FICO stands for Fair Isaac & Company.
FICO scores generally range from 365 to 840. The three credit bureaus use different
methods to calculate credit scores, so your scores will vary slightly from one bureau to
the next.
A study was conducted of the relationship between credit scores and the likelihood of a
delinquent account. For example, the odds of someone with a credit score of 595
having a delinquent account were 2.25 to one. The odds for someone with a credit
score of 780 defaulting on an account are 576 to 1, according to the study. Therefore, it’
s easy to understand that your credit score is a major factor in determining whether or
not you can obtain a loan.
In addition to your credit score affecting your ability to obtain a loan, it is a major factor
in determining the interest rate you will have to pay. The higher your credit score the
lower your interest rate. A recent example on the website www.Bankrate.com showed
that for a 30-year fixed-rate mortgage of $ 150,000, someone with a credit score above
760 would receive a 6.25% interest rate with monthly payments of $923 a month. In
comparison, someone with a credit rating between 620 to 639 would pay 7.84% with a
monthly payment of $ 1,084, or $161 per month more. That amounts to nearly $58,000
more in interest over the life of the loan. That same amount of money could grow to a
bit more than $196,000 in 30 years if contributed monthly to a retirement plan earning
7% annually.
The higher your credit score, the more you you’ll pay for mortgages, car loans, cell
phones and credit cards. But that’s not all! Insurance companies use credit scores to
determine the risk of losses from homeowner and auto policies. Premiums can be
substantially higher for those with low credit scores. The insurance companies claim the
studies have shown that losses are inversely proportional to individuals’ credit scores (i.
e., the lower your credit score the higher the risk of a claim and vice versa.)
The Michigan Court of Appeals recently ruled that state regulators can prohibit insurers
from using customers' credit scores to determine home and auto insurance rates. That
2-1 decision reversed a previous 2005 ruling by a lower judge who allowed companies to
keep using credit scores. An appeal to the State Supreme Court is expected soon.
Regardless of whether or not insurers can continue using credit scores in determining
premiums, a high credit score can save you plenty and ensure that financing is available
should you need it. A little work at maintaining good credit will provide a good return on
your effort.
David C. Patterson, CFP® and Erin Preston, CFP® are the owners of Patterson
Advisors, LLC, a fee-for-service-only financial advisory firm. Patterson Advisors, LLC is
a Registered Investment Advisor, registered with the State of Michigan, helping clients in
Waterford, Clarkston and Royal Oak, Michigan as well as other Oakland County,
Michigan communities . Visit www.pattersonadvisorsllc.com for more information or call
248-674-2108.
Published in the Oakland Insider, September, 2008
Paying Attention to Your Credit Score Can Save You
Money
By David Patterson and Erin Preston (formerly Patterson)