This is What Your Credit Score Can Get You

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So you have just gotten your credit score. All you know is what your credit rating is, but what does this mean for you and why does it even matter? How will a good credit score make your life significantly better than having an Average credit score? Without a pay bump, would having a, say, Excellent credit score do you any good?

Let’s have a look… 

Please note: The ranges and allocations may differ based on your location and the consumer credit reporting agency. For the purpose of this article, any differences are of no consequence. The principle is the core.

Scenario 1.

Excellent Credit Score

(720+)

Best interest rates and payment terms for loans

Scenario 2.

Good Credit Score

(680 – 719)

Competitive terms from lenders and mortgage originators.

Scenario 3.

Average Credit Score

(620 – 679)

Minimum credit score range to get fair terms.

Scenario 4.

Poor Credit Score

(580 – 619)

You can still get loans but only under your lender’s terms and at an increased interest rate.

Scenario 5.

Bad Credit Score

(500 – 579)

Your interest rate will be at least 3% above average.

Scenario 6.

Miserable Credit Score

(<500)

Getting any kind of financing is close to impossible.

How Does This Affect Your Borrowing, Practically?

Let’s look at an example of a house we want to buy:

We will keep it simple and not use too many data points (and make consistent assumptions) to make it easier to focus on the main point. Our considerations will include interest, Taxes, PMI, Insurance & Fees.

We are buying a house:

• Purchase Price: $250,000.00
• Period 20 Years

In each scenario, we will change only the interest rate and the required down payment. These are the only parameters your lender is likely to change based on how they perceive you as a lending risk.

(Please note that these rates are derived from US market-related rates. If the rates in your country vary, do not be alarmed. The principle still remains the same)

Scenario 1:

Interest Rate of 5%; Zero Down Payment

Total Monthly Payment                $2,197.81

Scenario 2:

Interest Rate of 6%; Zero Down Payment

Total Monthly Payment                $2,338.99

An Increase of $141.18 per month from Scenario 1

Scenario 3a:

Interest Rate of 7%; Zero Down Payment

Total Monthly Payment                $2,486.16

An increase of $288.35 per month from Scenario 1

Scenario 3b:

Interest Rate of 6%; Down Payment of 5%

Total Monthly Payment                $2,208.03

An increase of $10.49 per month from Scenario 1, but you have to raise a down payment of $12,500.00 before you get granted the mortgage. heavens forbid you use debt to raise this amount.

Scenario 4:

Interest Rate of 7%; Down Payment of 10%

Total Monthly Payment                $2,194.94

A decrease of $2.87 per month from Scenario 1 (you will be financing a significantly smaller amount, albeit at a higher interest rate), but you have to raise a down payment of $25,000.00 before you get granted the mortgage. Heavens forbid you use debt to raise this amount.

Scenario 5:

Interest Rate of 8; Down Payment of 20%

Total Monthly Payment                $2,006.21

A decrease of $191.60 per month from Scenario 1 (you will be financing a significantly smaller amount, albeit at a higher interest rate), but you have to raise a down payment of $50,000.00 before you get granted the mortgage. Heavens forbid you use debt to raise this amount.

Scenario 6:

Interest Rate of 10; Down Payment of 30%

Total Monthly Payment                $2,022.12

A decrease of $175.69 per month from Scenario 1 (you will be financing a significantly smaller amount, albeit at a higher interest rate), but you have to raise a down payment of $75,000.00 before you get granted the mortgage. Heavens forbid you use more debt to raise this amount.

So What Does All This Mean for You?

Now, let’s say we were to pair Credit Band 1 to Scenario 1, Credit Band 2 to Scenario 2, and so forth.

How would this affect how you thought about the different credit rating categories?

Let’s be clear, I am not a lender, so these scenarios are totally made up. What clearly emerges though, to me at least, is a compelling incentive to make having an excellent credit score a paramount priority.

Want to take this even further? Check out the scenarios that I postulate in, Should You Improve Your Credit Score BEFORE Getting a Mortgage?