Few things strike up a debate faster than asking what good is a credit score these days? There are those who totally spurn the idea of some 3rd party determining their credit worthiness. There are others who worship the mighty FICO, well aware of its ability to save them money on future loans, insurance, and even affect their job hunt. I fall somewhere in the middle. Still can’t help but wonder, what good is a good credit score?
I would not suggest someone go out of their way to wreck their FICO score, but I also wouldn’t recommend people be too concerned with their credit scores, either. For far too long we have been beholden to this score, and taken on unnecessary debt in the name of improving our standing. If you manage money wisely, make smart decisions when it comes to debt – including the type of debt you take on, and how well you repay it – you should have no trouble securing a high FICO score. And here are a few benefits…
Higher FICO, Lower Mortgage Payment
According to the research at Information Research Services (infomars.com), as MyFICO.com, the difference in a 620 credit score and a 760 credit score means a $197 lower mortgage payment (on a 30-year, fixed rate mortgage of $200,000). This is based on rates as of March 27, 2009, and may fluctuate some, but you get the idea. Having an upper-tier FICO score can lead to significant savings in interest on real estate purchases.
Not only will optimal rates be available only to those with higher credit scores, but it could mean the difference in qualifying for a mortgage loan, or having to pay additional points to secure a decent interest rate. The mortgage industry is probably the biggest supplier of FICO worries because most of us cannot afford to pay cash for a house, so financing is our only option.
Besides saving money on car insurance, those who opt to finance a new car purchase on shorter terms (36 months) with a FICO score greater than 719 save about $119 a month over those with credit scores below a 590. Personally, I don’t plan to ever finance a car again, but if I did I would obviously want to qualify for the lowest rates possible. Bad enough car payments are as high as they are these days, but toss on another $100 due to high interest charges and it becomes downright ridiculous.
Higher Scores Lead Better Employment?
This is an area where there just isn’t much hard evidence to support FICO’s (and much of the financial press) claim that low credit scores can affect employment. I’m sure employers in certain industries would be interested to know your FICO score as one piece of determining your overall employment potential, but using FICO as a screening tool has so many limitations.
Credit scores don’t tell employers a thing about the level of education someone has achieved, their savings and other assets, their work ethic, their trustworthiness, etc. For instance, I used to work with someone who had trouble finding a job in her degree field (accounting) because she had gone through a nasty divorce and her ex-husband destroyed both their credit through running up unpaid credit cards, gambling, and a host of other financial problems.
It was only when she discovered this was going on behind her back that she ultimately asked for divorce, but the damage to her credit was done, as a couple of the accounts were in both their names (her husband forged her signature as a co-applicant). Even though what he did was a crime, it was a nightmare to get accounts removed from her report, and things continued to “pop up” for months.
Potential employers looking for someone to handle their company’s money may incorrectly toss her resume based on a low credit score, when in fact she was probably more qualified than many other candidates in terms of education, work history, etc.
I’m sure you could dig up an employer or two to own up to using FICO scores for screening purposes, but most won’t. I’m also sure you’d be hard pressed to find anyone in the banking industry that believes is not true. Again, we’ve been oversold on FICO and its importance in our society.
Don’t get me wrong, I think there is a place for credit scoring in helping insurers and potential lenders determine the risk of a potential customer. However, I don’t think it is fair to label people with low (or non-existent) scores as bad, as if they deserve to walk around with some type of “Scarlet Letter” reading FICO=607 on their forehead. Credit scores are but a small piece of the overall picture of someone’s creditworthiness, and to allow it to be the lone determining factor is just plain lazy on the part of lenders.
As consumers, the onus is on us to manage our credit wisely, check our credit reports periodically, and don’t go out of our way to damage, or enhance, our FICO score. If you find yourself in my friend’s situation, dealing with a low FICO, there are plenty of ways to improve your credit score on your own. Do not let desperation lead you to one of these “credit repair” places who charge fees for things that you can do yourself. The number one thing that improves your credit score is time. Yes, it heals credit wounds, too.
Get your updated FICO score today at MyFICO.com