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Good credit means lower interest rates
By David Pilley on January 7, 2011

handshake-(1).jpgIf you know anything about the credit world, you should know the importance of your credit score. It’s that three-digit number assigned to you that plays a key role in determining the factors of a loan or whether or not you even get a loan in the first place. Lenders use the credit score to find the risk factor in giving you a loan and trusting you to pay it back. The most widely used score, determined by the Fair Isaac Corporation, is on a scale from 300 to 850. As you have probably guessed, a higher number means a higher score, and potential lenders will think the risk factor is less with a higher score.
But just how good is a “good” credit score? Economists all agree that 850 is a perfect score (and that it is highly unobtainable), but there is no official line where economists can all agree that a score above is “good” and a score below is “bad.” In essence, there is a bit of wiggle room. Some say anything below 600 is bad, and others say 620 is also a “bad” credit score. The 600s is this “wiggle room,” pretty much where the average American’s credit score is. However, being on the high end of the 600s is better than being on the lower end, and, while not all economists agree, a number that can be considered a “good” credit score begins somewhere between 680 and 700.

Your credit score mostly determines how high your interest rate will be. Anything below a 620, and your rate will be substantially higher. A credit score of 620 is usually the cutoff for an interest rate based on the “prime rate,” an interest rate that will actually be one or two percentage points higher than the prime rate. A credit score in the 500s or lower could mean an interest rate three to five percentage points higher than the prime rate (or even more), while a credit score in the 700s and higher means an interest rate that might just be one percentage point higher than the prime rate. This can be a deciding factor in your ability to maintain a monthly mortgage payment. With a good credit score, your rate might be around 5.5%, but with a bad credit score, seven or eight percent is not uncommon.

To maintain a good credit score, your history is the most important piece. Making timely payments on an account that has existed for a few years shows you are able to deal with money. Lenders like seeing customers who are able to use different types of credit, as well as multiple credit accounts, but you should only open a new account when necessary and if you are able to handle the fiscal responsibility. Finally, make sure outstanding balances on your credit card accounts are low. Any balance higher than 25% of the card’s spending limit, and your credit score could drop out of the good and into the bad. Make timely payments, keep low balances, and maintain a healthy history on your credit accounts, and your credit rating will certainly be good.
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