Thursday, November 13, 2008

What bad credit really costs you Part 2

While the median FICO score in the United States is 723, which would yield favorable loan conditions, for those whose score falls way below that mark, the ramifications are costly.

A median of 723 means half the people fall below that score and half have scores higher. More specifically, here's a breakdown of how scores are distributed across the population, according to MyFICO:


Breaking down the numbers: % of population and their score:

2% - 300-499

15% - 650-699

5% - 500-549

18% - 700-749

8% - 550-599

27% - 750-799

12% - 600-649

13% - over 800


According to MyFICO, a division of Fair Isaac, a consumer with a FICO score between 720 and 850 might get a 5.922% rate on a $200,000 30-year fixed mortgage rate. That would give him a payment of $1,189 a month and $228,072 in interest over the life of the loan. A consumer with a FICO score between 675 and 699 might get a 6.584% on the same loan, which would cost him $1,275 a month, with $259,074 in interest over the life of the loan, or $31,002 more.

The consumer with a FICO score between 620 and 674 might get a 7.734% rate and pay $1,431 per month, costing him $315,021 in interest over the life of the loan. That's $55,947 more than the middle-score borrower and $86,949 more than the borrower with excellent credit.

Worse yet, a consumer with a score between 560 and 619 might get an 8.531% rate, pay $1,542 per month and pay $355,200 in interest over the life of the loan. The difference in interest paid over the life of the loan between the first and last example is more than $127,000.

If at first you don't succeed

While the dollar amounts are most striking when it comes to primary mortgages, the effects of lower credit scores are not limited to your purchase of a home. If you want to refinance and pull out some cash to finish your basement or pay off some credit-card bills, your credit score can not only determine your interest rate, but it can also dictate how much of your equity you can cash out. The higher your credit score, the higher the amount you'll be able to pull out. "Someone with a credit score of 580 might only be able to receive 70% of the equity in their home while someone with a 600 might be able to take out more," says Jones.

Likewise, if you want to take out a home-equity loan of $20,000, your credit score could cost you thousands of dollars. According to MyFICO, a consumer with a score between 720 and 850 might qualify for a rate of 7.911% and pay $190 a month and $14,219 over the course of the loan. For that same $20,000, a consumer with a credit score between 640 and 659 might qualify for a rate of 9.486% and pay $209 per month and $17,562 over the course of the loan.

Auto loans can be just as costly for people with lower credit scores. For a $20,000, 48-month auto loan, MyFICO calculates that a consumer with a score between 720 and 850 might qualify for a 6.282% rate and pay $472 per month. That same consumer would pay $2,670 in interest over the four years of the loan. A consumer with a FICO score between 660 and 689 might qualify for an 8.844% rate and pay $496 per month and $3,819 in interest over the course of the loan. That same car cost the second borrower an extra $1,149 -- $23.94 a month -- just because of a lower credit score.

By Tamara E. Holmes, Bankrate.com


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