The Benefits of a Higher Credit Rating

Written by Dana Neal

Higher credit ratings can save you money.

It's common knowledge that a higher credit rating can determine loan approval or denial, but having a better score can also determine how much interest is paid.

And sometimes this can mean many thousands of dollars, with the biggest jumps in savings occur in the 620-700 range for mainstream mortgage and auto loans.

Using FICO's Loan Savings Calculator (www.myfico.com), it's easy to see what kind of savings someone seeking a $200,000 mortgage can expect from a small change in his or her credit score. Figure 5 shows an example from June 6, 2005.

Someone with a score of 674 versus 700 can expect to pay $222 more per month ($1,378-$1,156), $2,664 more per year ($222 x 12 months), or $79,914 more over the life of the loan ($296,207- $216,293). But 26 FICO points doesn't really tell the story. Note that all you need if you have a score of 674 is one point higher in order to go to the next tier, the 675-699 tier, which represents a savings of $153 per month ($1,378-$1,225).

Figure 5.

This drives home the importance of having a good credit rating!

1. FICO claims, "Bad credit hurts you more than age helps you." My experience does not bear this out. FICO's Nexgen model is supposed to eliminate this problem. And yet, if FICO claims that it's not a problem with the classic FICO scoring model, why does it then claim that Nexgen fixes the problem?