How great is great credit?
What Kind of Loans Can You Get?
In short: pretty much any loan you want.
Now, that’s not entirely true. Banks and other traditional lenders will also want to look at things like your income before approving a loan. If you have a great credit score but a low-income, then there are certain loans—especially unsecured personal loans—that you might not qualify for.
Still, having a score of 720 or higher means that pretty much any kind of loan is achievable. If you want to buy a house, you’ll qualify for a good mortgage. If you want to buy a car, you’ll be able to get approved for a car loan. Looking for a credit card? Take. Your. Pick.
This is especially true for folks who have a credit score in the upper part of this range, from 780 to 850. While folks with scores lower than that might occasionally get their applications turned down—especially for really high-end credit cards—people with scores of 780 and above can pretty much get approved for anything—assuming that their income makes repayment of the loan feasible.
What kind of Interest Rates Can You Get?
If you have a score of 720 or above, you’re going to be seeing very low-interest rates across the board.
According to Rod Griffin, Director of Public Education for the credit bureau Experian, says, “A credit score is a way of grading your creditworthiness–or ‘trustworthiness’ to lenders. It’s a numeric score usually falling in a scale between 350 and 850. The better your credit score, the lower risk you are to lenders. They’ll see you as someone they can trust to repay the money they may lend you. You will also generally qualify for lower interest rates, which will save you money.”
A score above 720 says to lenders that you are very responsible when it comes to borrowing money. You don’t take out more than you can afford and you always make your payments on time.
If you are seen as a low-risk by a lender, they will be willing to give you a lower interest rate. With higher risk borrowers, lenders charge them more in part to guard against the risk that they won’t repay. It’s a bit of a catch-22: The less likely you are to pay your loan back, the more money you get charged, which makes the loan harder to repay, which makes it less likely that you’ll pay it back.
According to the MyFico Loan Savings Calculator, a credit score of 760 could get you a 3.845% interest rate on a $300,000, 30-year fixed-rate mortgage. All in all, that could save you almost $25,000 over the rate you’d pay with a credit score of 699.
If you took out a $30,000 48-month auto loan to buy a new car, the MyFico Loan Savings Calculator estimates that a score of 720 or above would net you an interest rate of 3.458%. When compared to the 6.88% interest rate you would pay with a score of 689, that lower rate would save you well over $2,000 over the life of the loan.
And lastly, there are credit cards. While the rates on these cards can vary greatly from company to company, Credit Karma pegs the interest rates for borrowers with great credit at an average of 14%.
What Can I Do to Improve My Score?
Your FICO score is created using information from your credit reports, which are compiled by the three major credit bureaus—Experian, TransUnion, and Equifax. According to Rod, “Your credit report is a document that describes how you use your credit and whether or not you pay your debts. It contains information about your credit cards, any installment loans, and other debts, and whether you’re paying them or not. The credit report is not the same as the credit score. A lender can use your credit report to calculate your score, or they can request that your score be calculated. The score is a snapshot of your creditworthiness at the moment the credit report is requested.”
Your credit score is calculated using these five major categories:
Amounts Owed: 30%
Length of Credit History: 15%
New Credit: 10%
Credit Mix: 10%
As you can see, your payment history and amounts owed make up a total of 65% of your score. If you’re looking to improve your credit rating, those two categories are the best place to start.
Credit expert Chella Diaz has two great pieces of advice:
- Start making your payments on time. This might seem a little obvious, but making on-time payments is a huge piece of your credit score. If someone’s going to lend you money, they need to be certain that you’ll make your payments on time. Diaz says that you making your payments on time for at least six months should help your credit score increase.
- In regards to your credit card balances, Diaz says that your balance should not exceed 30% to 35% of the limit on the card. Ideally, you shouldn’t be carrying any balance on your card month to month. You should pay the entire thing off in full to avoid getting charged any interest at all. But paying down your balances until they are below 30 to 35% should lead to your credit score increasing.
Chella Diaz, is a mom, author, speaker and consultant. She empowers parents with young children to set up their kids to be their own bank. She facilitates workshops for college students. One of Chella’s greatest strengths is showing people the ways they can save money so they always have money for the things that are most important. You are the boss and the money is your employee. How are you going to manage it?
Rod Griffin is Director of Public Education for Experian. He leads Experian’s national consumer education programs and supports the company’s community involvement and corporate responsibility efforts. Rod oversees the company’s financial literacy grant program, which awarded more than $850,000 in 2015 to non-profit programs that help people achieve financial success. He works with consumer advocates, financial educators and others to help consumers increase their ability to understand and manage personal finances and protect themselves from fraud and identity theft.
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The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.