Turning Your Credit Score into $100,000 Savings
George Boelcke CCP
August 14, 2010
Dave and Karen (not their real names) were ready to downsize apartments. With high vacancy rates and great lease offers, they found an ideal two bedroom apartment on a golf course, and a monthly payment of $700 less than they´re currently paying.
However, their excitement of saving more than $8,400 a year in rent faded the day after their credit application was submitted. Dave and Karen were turned down for the lease, because of their credit score.
Another family got a rude awakening when their home insurance went from less than $500 a year to $1500. Why did their premium triple? Because their credit score had dropped after not paying their Sears card for three months, according to an investigative story on Marketplace. This 90-day delinquency drops a credit score by more than 100 points, and will now penalize them for $1,000 higher premiums each year.
Many people may know the significant impact a 100 point rise, or drop, in their credit score has on their mortgage, car loan, and HELOC rates. However, there are many other areas which use our credit scores to set our rates and premiums. They´re areas most people don´t know, hadn´t considered, and may never find out about.
According to newly released statistics by FICO, Inc. more than 47 million people have a credit score of less than 600. In fact, the average national score has now dropped to 599, and will likely continue to drop for some time to come. Plus, there are an additional 61 million people with scores below 720. So, for more than 108 million Americans, moving their scores to at least the 720 mark will have a significant impact on their financial situation.
With credit cards:
In the new borrowing reality, someone with a 620 credit score likely won´t even be approved for a standard credit card. However, the interest rate won´t be any different between a new card and an existing account. To apply for a new card, the cost may be even higher with a 30 to 40% subprime rate.
A 720 credit score will qualify for 11.9% rates, compared to 19.8%, and much higher, for a 620 score. With an average balance of more than $15,000 for those anyone who actually carry a credit card balance, that low-score penalty translates to an extra $8,828 of interest, and probably much more. And that´s assuming the balance will be paid off in 10 years, something that is certainly wildly optimistic for most people.
With home and auto insurance:
Yes, insurance companies use your credit score to set your auto and home insurance rates. Is it allowed? Yes. Under the Fair Credit Reporting Act, credit information can be used as a factor to set your premiums. Whether it´s fair, necessary, or appropriate is quite another matter. However, according to the Property Casualty Insurers Association of America, credit information, or so-called credit-based insurance scoring, has been used for more than 15 years.
According to an analysis by Consumer Reports, this method of calculating a driver's risk could end up costing consumers hundreds of dollars more each year. The majority of insurance companies use your modified credit report from Fair Isaac, or ChoicePoint, while a few have developed their own internal scoring models. But how will it impact your premiums? A study by the Texas Department of Insurance found that half of all policy holders will pay more, while the other half will pay less in premiums than they would have, without the use of credit scores.
With the national average auto insurance of $1,577, according to Carinsure, a 100 point rise in your credit score will reduce your premiums by at least 25%, or $394. On the average $638 home insurance policy, quoted by homeinsure.com, the savings would translate to $160. Both assume an accident-free record for five years, and a claims-free home owner policy, and no other changes to the policies.
With private student loans:
One additional example where credit scores matter a lot, involves the more than $157 billion private student loans. Federal loans do not use credit scores to set interest rates, however, private loans do – and in a big way. It´s another reason to avoid them, whenever possible, or at least to shop around, because rates vary wildly even without a spread in credit scores. According to Student Lending Analytics, the rate spread between a good and poor credit score will be around six percent.
Based on quotes from Sallie Mae, just a $10,000 student loan, financed over 84 months, will be either 2.88% or 10.25%. The difference in interest, based on a credit score, adds an additional $3,370 of interest!
Your credit score matters a lot. For a pretty average family, the additional costs of a 620, versus a 720 credit score, translates to more than $100,000 over just 30 years. And that´s only based on one $200,000 mortgage, three car loans in that time, a 10-year credit card, below average $20,000 HELOC, and a lifetime of higher auto and home premiums.
In the coming months we´ll look at some additional areas of your life where your credit score is used and few people know the implications. These range from vast numbers of security clearance revocations, to getting a job, or a promotion, to being able to qualify for bonding, or even holding insurance, or brokerage licenses in some states which require a minimum credit score.
Knowledge is power. Because you cannot change or fix what you do not know, or understand.
However, their excitement of saving more than $8,400 a year in rent faded the day after their credit application was submitted. Dave and Karen were turned down for the lease, because of their credit score.
Another family got a rude awakening when their home insurance went from less than $500 a year to $1500. Why did their premium triple? Because their credit score had dropped after not paying their Sears card for three months, according to an investigative story on Marketplace. This 90-day delinquency drops a credit score by more than 100 points, and will now penalize them for $1,000 higher premiums each year.
Many people may know the significant impact a 100 point rise, or drop, in their credit score has on their mortgage, car loan, and HELOC rates. However, there are many other areas which use our credit scores to set our rates and premiums. They´re areas most people don´t know, hadn´t considered, and may never find out about.
According to newly released statistics by FICO, Inc. more than 47 million people have a credit score of less than 600. In fact, the average national score has now dropped to 599, and will likely continue to drop for some time to come. Plus, there are an additional 61 million people with scores below 720. So, for more than 108 million Americans, moving their scores to at least the 720 mark will have a significant impact on their financial situation.
With credit cards:
In the new borrowing reality, someone with a 620 credit score likely won´t even be approved for a standard credit card. However, the interest rate won´t be any different between a new card and an existing account. To apply for a new card, the cost may be even higher with a 30 to 40% subprime rate.
A 720 credit score will qualify for 11.9% rates, compared to 19.8%, and much higher, for a 620 score. With an average balance of more than $15,000 for those anyone who actually carry a credit card balance, that low-score penalty translates to an extra $8,828 of interest, and probably much more. And that´s assuming the balance will be paid off in 10 years, something that is certainly wildly optimistic for most people.
With home and auto insurance:
Yes, insurance companies use your credit score to set your auto and home insurance rates. Is it allowed? Yes. Under the Fair Credit Reporting Act, credit information can be used as a factor to set your premiums. Whether it´s fair, necessary, or appropriate is quite another matter. However, according to the Property Casualty Insurers Association of America, credit information, or so-called credit-based insurance scoring, has been used for more than 15 years.
According to an analysis by Consumer Reports, this method of calculating a driver's risk could end up costing consumers hundreds of dollars more each year. The majority of insurance companies use your modified credit report from Fair Isaac, or ChoicePoint, while a few have developed their own internal scoring models. But how will it impact your premiums? A study by the Texas Department of Insurance found that half of all policy holders will pay more, while the other half will pay less in premiums than they would have, without the use of credit scores.
With the national average auto insurance of $1,577, according to Carinsure, a 100 point rise in your credit score will reduce your premiums by at least 25%, or $394. On the average $638 home insurance policy, quoted by homeinsure.com, the savings would translate to $160. Both assume an accident-free record for five years, and a claims-free home owner policy, and no other changes to the policies.
With private student loans:
One additional example where credit scores matter a lot, involves the more than $157 billion private student loans. Federal loans do not use credit scores to set interest rates, however, private loans do – and in a big way. It´s another reason to avoid them, whenever possible, or at least to shop around, because rates vary wildly even without a spread in credit scores. According to Student Lending Analytics, the rate spread between a good and poor credit score will be around six percent.
Based on quotes from Sallie Mae, just a $10,000 student loan, financed over 84 months, will be either 2.88% or 10.25%. The difference in interest, based on a credit score, adds an additional $3,370 of interest!
Your credit score matters a lot. For a pretty average family, the additional costs of a 620, versus a 720 credit score, translates to more than $100,000 over just 30 years. And that´s only based on one $200,000 mortgage, three car loans in that time, a 10-year credit card, below average $20,000 HELOC, and a lifetime of higher auto and home premiums.
In the coming months we´ll look at some additional areas of your life where your credit score is used and few people know the implications. These range from vast numbers of security clearance revocations, to getting a job, or a promotion, to being able to qualify for bonding, or even holding insurance, or brokerage licenses in some states which require a minimum credit score.
Knowledge is power. Because you cannot change or fix what you do not know, or understand.
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