Buy Now…Pay Later.
Basically, that’s what credit enables you to do. Credit allows you to finance large purchases today, like an education or new car, and pay for it over time with interest. Typical forms of credit include credit cards, education loans, auto loans, and mortgages. You pay interest, so the item costs more over time. But keep in mind that while credit lets you pay later, it doesn’t mean you can pay late (at least, not without consequences). Say you buy a cool new iPod® for $300 using your credit card and you miss your monthly payment—there’s a penalty. You’ll get charged a late fee and your interest rate could jump from 9% to 23% so now that $300 iPod® could end up costing you $500 by the time you pay it off. Ouch!
Your FICO® Score.
If you have at least one credit account that has been open for six months or longer, and at least one credit account that has reported to a credit bureau in the last six months, then you have a credit score. The most commonly used credit score is the FICO (named after the company who developed it, Fair Isaac Corporation). A high score means you’re a good risk and you will earn lower rates and better terms on loans. Right now that may mean a better rate on your credit card or car loan. In the future, it could mean whether you will be able to qualify for a home loan.
Check Out The Charts And Graphs Below To See The Whole FICO Score Picture.
The Classic FICO Score Ranges from 300 – 850. An 850 score is perfect and you will get the best rates and lowest fees on credit. Anything below 600 is considered poor credit. With this credit score you are not likely to be extended any credit
The national average score is 660. Any score over 720 is excellent
What’s Your FICO® Score?
You Can get a free credit score and report from iGrad. It’s a good idea to take a look at your credit score and report at least once a year to ensure there are no mistakes. More that 25% of all credit reports contain errors that can potentially hurt your credit score. Your FICO score is based on the information in your credit report and is calculated by each credit bureau based on the following factors in this chart:
35% Your Payment History
Late payments can damage your score quickly, but a record of ontime payments helps your score.
30% Your Debt (how much you owe)
The more you owe as proportion of your credit limit, the lower your score will be.
15% Length of Credit History
The longer your credit history, the better.
10% New Credit
Opening new credit accounts may potentially lower your score; it represents greater credit risk.
10% Types of Credit
Responsibly managing different types of credit— such as a student loan, auto loan, and credit cards—can help your score.
Let’s take a look at what credit can do for you and against you:
Meet Jason and Jessica
Two recent graduates with similar goals, but very different FICO scores.
Jason has a score of 610. Jessica has a score of 780. Check out the difference.
| | Jason’s FICO Score (610) | Jessica’s FICO Score (780) |
| | Jason has a hard time even getting credit. He’s been denied for several loans already. These credit inquiries are now part of his credit history and show up on his report. | More credit is available to Jessica. In fact, companies even seek her out. She gets offers all the time with the best rates and terms |
| | Because Jason’s rates and fees are higher, he is paying more over the life of his loans. Say he finances a new car, it could cost him 30% more than Jessica’s same car…lots more money! | You know the story…Jessica is paying less over the life of her loans. She can get the same products and services that Jason gets; only she pays less for them. |
| | When Jason applies for a loan, it takes longer for him to be approved (if he even gets approved). He may wait twice as long as Jessica to find out if he can get a car loan. | Jessica gets fast credit approvals. Sometimes she even gets instant credit! |
| | Jason has to pay larger cash deposits when he opens utility and phone accounts. | Jessica’s deposits on utility and phone accounts are smaller than Jason’s. In fact, in some cases, because her FICO score is so high, the deposits are waived. |
| | For Jason and other low scorers, landlords often reject their applications for apartments because they are bad credit risks. | You know how it ends—that cute little one bedroom downtown, with the fireplace and balcony—Jessica’s calling it home. And Jason? Well let’s just say, he’s moved back in with his mom so he can afford his loan payments. |
So it’s pretty clear how much financial impact a FICO score can make.
Here’s how your score could affect your loan payments for a $20,000 car loan:
| | FICO Score | Interest Rate | Monthly Payment |
| | 760-850 | 5.93% | $119 |
| | 700-759 | 6.15% | $122 |
| | 660-699 | 6.43% | $126 |
| | 620-659 | 7.24% | $136 |
| | 580-619 | 8.27% | $151 |
| | 500-579 | 9.13% | $163 |
Hypothetical rates based on myfico.com
But What Should You Do If You Just Can’t Pay If You Can’t Pay?
If you find yourself unable to make payments on your loan or other form of credit, you can try the following to help keep your credit score from decreasing:
- Contact your lenders and creditors right away. They may be able to help by reducing or freezing your payments. Being proactive is important because even one late payment will negatively impact your credit score.
- For a loan, request lower payments or forbearance (a temporary postponement or reduction of loan payments, based on financial hardship, which is awarded on a case-by-case basis by the lender). But remember, while you are in forbearance, interest continues to accrue on the unpaid amount.
- Consolidate your debt. Lenders offer consolidation packages that turn all your loans into a single loan, and gives you the option to stretch out your payment term, which could lower your monthly payment.
What it Takes to Improve a Poor Credit Score.
- Patience. Patience. Patience. But start today.
- Pay all your bills on time
- Check your credit report regularly to ensure there are no mistakes
- Get you debt-to-income ratio under 30%
- Make sure your credit is not at its limit. You should have at least 20% room available on all revolving credit.