Credit Score Affects Loans and Credit Cards

As mentioned earlier, having a good credit score can make your life easier. Now let’s take a closer look at the impact your credit score has on what loans you qualify for and how much you’ll pay. Specifically, I’ll look at three of the most common types of credit accounts — mortgages, car loans, and credit cards.

Credit cards

You’ll probably be able to get a credit card with just about any credit score. What varies dramatically will be the type of credit card for which you will qualify.

  • Excellent credit: With a top-notch credit score, you’ll be able to obtain the lowest advertised interest rate on most credit cards — this varies by card, but may be less 10%. More notably, you’ll be able to qualify for the best rewards credit cards that allow you to earn incentives, including cash back, airline miles, and hotel stays. Only consumers with excellent credit will be able to qualify for the best rewards offers.
  • Good credit: If you’re a notch below top credit, you can still qualify for a wide range of cards. While you may be shut out from some of the best rewards cards, you still may qualify for 0% introductory APRs that can be ideal for balance transfers. Your ongoing interest rate may be a bit higher, creeping into the mid-teens.
  • Average credit: You may be able to qualify for many of the same cards those with good credit can snag. The main difference is that you’ll probably be paying a much higher interest rate for the privilege, typically approaching or above 20%.
  • Bad credit: With bad credit, you can still get a credit card. However, you may be limited to a secured credit card that requires a security deposit. This deposit is often equal to or greater than the amount you can charge, and the credit-card company can take your deposit if you don’t pay your bill. If you do qualify for an unsecured card that doesn’t require a deposit, your credit limit will probably be very low.

Mortgages

A good credit score can make all the difference when you want to become a homeowner. While loans to those with bad credit have recently been on the rise in other sectors, that’s not the case with mortgages. Lenders were burned by the subprime mortgage crisis of 2008 and have kept a lid on loans to subprime, or bad-credit, borrowers.

For a more concrete example, let’s say I’m applying for a fixed-rate, 30-year mortgage for $200,000 in Tennessee. Take a look at the chart below, drawn from the myFICO loan savings calculator, to see how my credit score would affect my interest rate, monthly payment, and what I ultimately pay in interest over the life of my mortgage.

FICO Score Interest Rate Monthly Payment Total Interest Paid
760 and above 3.485% $896 $112,710
700-759 3.706% $921 $131,648
680-699 3.883% $941 $138,900
660-679 4.096% $966 $147,736
640-659 4.525% $1,016 $165,884
620-639 5.069% $1,082 $189,553

 

As you can see, if I have a FICO score in the bottom tier of this table, I’ll be paying $186 more a month for my mortgage than someone with a score of 760 or above. I’ll also be paying almost $67,000 more in interest over the life of the loan.

Interestingly, mortgage lending has tightened so considerably that it’s difficult to get a mortgage below, or even at, the 639 mark. One exception can be the Federal Housing Administration loan program, which may make loans to borrowers with scores as low as 580.

Car loans

The good news: It’s much easier to land a car loan than a mortgage if you have bad credit. In fact, bad credit auto loans made up more than two-thirds of subprime lending volume in the first 11 months of 2014, according to Equifax.

The bad news: You will pay a much higher interest rate than someone with a good credit score.

Let’s say I want a 48-month, $15,000 auto loan to finance a new car in Tennessee. Here’s how the numbers shake out:

FICO Score Interest Rate Monthly Payment Total Interest Paid
720 and above 3.07% $332 $959
690-719 4.292% $341 $1,351
660-689 6.049% $353 $1,925
620-659 9.598% $378 $3,122
590-619 15.177% $419 $5,103
500-589 16.909% $432 $5,742

 

As you can see, you can still land a loan with a bad credit score, but you pay a big premium. I would pay $100 more a month and nearly $4,800 more over the life of my loan if I have a credit score on the bottom tier of this list instead of the top tier.