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Credit Score Ranges

How A Good Credit Score Saves You Money

Lenders make money off of the interest payments that they receive from customers that take out loans with them. So, what happens if customers do not make their monthly payments? Lenders lose money, plain and simple. But they have a way of recovering the money that they’ve lost. They simply charge higher interest rates to people who are more likely to default on their loan.

Here’s an example: Let’s suppose that a banker lends out $1,000 to eight different people (and they all have terrible credit scores). The banker hits all eight customers with high interest charges because he knows statistically that one of the eight will default on the loan. The remaining seven, who continue making high interest payments, will essentially cover the cost of the defaulted loan. The banker still makes money in the long run (‘cuz that’s what bankers do).

You may be wondering what all of this has to do with you. Well, I’m getting around to it; just give me a minute to share with you the statistics of defaulted loans in relation to credit scores. The following table will show you how banks (and other companies who extend you credit) calculate risk based on credit scores. The left column indicates credit scores and the right column indicates the odds that a person with that credit score will honor the loan.

Credit Score RangeOdds of Customer Repaying
Above 8001292 to 1
760 to 799597 to 1
720 to 759323 to 1
700 to 719 123 to 1
680 to 69955 to 1
660 to 67938 to 1
620 to 65926 to 1
500 to 6008 to 1
Below 500 Too Risky – No Loan

Okay, let’s bring it home.  What does this have to do with you?  If your credit score is less than perfect, you will have to pay higher interest rates on all types of credit including mortgages, car loans, credit cards, personal loans, consumer loans and more. All of these higher interest payments can add up to a lot of money.

Don’t believe it?

Think about this: A $200,000 home at 6% will cost you $231,676.38 in interest payments over the course of a 30-year loan. Keep in mind that I’m only talking about interest here. This price does not include the $200,000 principle balance (so you end up paying $431,676.38 for a $200,000 home). A 6% interest rate is very good. In fact, it’s one of the lowest rates you can get. But what happens if you can’t get a 6% loan? What if you have to finance at 8% because of a poor credit rating? You will end up paying $328,310.49 in interest over the term of the loan. That’s a difference of $96,634.11. Can you afford to waste almost $100,000? (Unless you are Bill Gates, I assume the answer is an emphatic “no!”).  Most of us could put an extra $100,000 to pretty good use rather than giving it to some fat-cat banker.  (Like how about buying a couple of new cars, or paying for your kids’ college education, or retiring early?)

Bad credit scores can have a devastating affect on your credit card payments as well.  It’s simple. Folks with bad credit scores are charged high interest rates.  High interest rates cause your monthly payment to go up.  High monthly payments mean you will be paying the credit card companies tons of money. 

The fat-cat bankers get fatter….

But these are just a few of the obvious ways that a low credit score costs you money. In other articles we will take a look at some things that you may not have thought about.


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