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820 credit score: How much cheaper are loans with great credit?

Peter MillerThe Mortgage Reports Contributor

The elusive 820 credit score: Is it worth pursuing?

Creditors consider applicants with an 820 credit score as “golden.” If you achieve this, credit is widely available to you, and you’ll pay less for it. In some cases,  much less.

  1. Mortgage rates for those with top-level credit run about 1.5 percent lower than those for borrowers with fair credit.
  2. Interest rates on five-year auto loans run approximately 11 percent less for borrowers with excellent credit than those with poor credit scores.
  3.  Credit card rates typically run between 13 and 23 percent, depending on your credit score.
Verify your new rate (Aug 21st, 2018)

An 820 FICO score is not a unicorn

An 820 credit score is a thing of beauty, the magical key that opens a world of lower mortgage rates and easier loan applications.

At first, it may seem that an 820 credit score is a mythical goal, something only achieved by misers, hermits and CPAs. The reality is that everyone has a chance to obtain high credit scores, and it’s actually easier than it seems.

Related: Raise your FICO 100 points in 2018 and save big on everything

When we talk about and 820 credit score what we’re really discussing is the FICO system, the pioneering credit score concept developed by the Fair Isaac Corporation. The idea is to uniformly measure the use of credit. Possible scores range from 300 to 850 on the FICO system while other credit scoring programs have other ranges.

Credit score basics

Credit scores do not measure income. Your score does not go up because of your income increases. You can make a low income and have terrific credit, and you can also be rich and have a credit score that’s in the dumper. The real issue is how you pay your debts.

According to Fair Isaac’s MyFico site, credit scores are based on five factors:

• Payment history: 35 percent
• Amounts owed: 30 percent (also called utilization, or percent of available credit used)
• Length of credit history: 15 percent
• Credit Mix: 10 percent
• New Credit: 10 percent

You don’t need perfect credit to get a mortgage or any other type of financing. It’s expected that only a tiny number of people will have stratospheric credit scores, and that’s okay. Many lenders offer their best rates to borrowers with credit scores in the 700 range and above.

Related: What credit score do you need to rent an apartment?

Grades or tiers on personal lending, mortgage or credit card sites often look like this:

  • 720 or more: Excellent
  • 660 – 719: Average/Good
  • 620 – 659: Fair
  • 620 or lower: Poor

Importantly, different lenders have different credit score standards. Lender A may award its best rate to someone with a 720 score while Lender B might require 740. Because different lenders have different credit standards, it pays to shop around for rates.

The 1.5 percent difference

Mortgage rates for those with top-level credit run about 1.5 percent lower than those for borrowers with fair credit.

MyFico has a calculator which shows how credit scores can relate to mortgage rates. The usual rule applies: lower scores equal higher rates. For example, a borrower with a 620 credit score might pay 5.8 percent, while a borrower with a 760 score could have financing at 4.25 percent.

For a $200,000 mortgage, the difference is a monthly payment for principal and interest of $1,180 versus $985. That’s $195 a month, or $2,340 a year.

Auto loans: The difference between 3% and almost 14%

Interest rates on five-year auto loans run approximately 11 percent less for borrowers with excellent credit than those with poor credit scores.

In the world of auto financing, credit score categories are divided into five groups, according to Experian.

  • Super prime – 781-850
  • Prime – 661-780
  • Nonprime – 601-660
  • Subprime – 501-600
  • Deep subprime – 300-500

At the end of 2017, according to Experian, super prime borrowers were paying 3.17 percent for new car loans. And deep subprime borrowers? Their typical new car financing was priced at 13.76 percent, a difference of nearly 11 percentage points, or 1100 basis points in finance speak.

For a five-year, $30,000 auto loan the difference in costs is significant. The deep subprime borrower will pay $694.32 per month while the super prime borrower will have a cost of $541.33. That’s a difference of over $150 per month or $1,800 per year.

Wouldn’t you rather pay 13 percent than 23 percent?

Credit card rates typically run between 13 and 23 percent, depending on your credit score.

As with other forms of borrowing, credit card interest levels are related to your credit scores. Higher credits scores will produce lower interest rates.

That said, credit card interest rates are not related to general economic trends – today’s credit card interest rates are pretty much the same as they were in 2006. In 2006 the prime rate was 8.25 percent at mid-year, a rate which fell to 4.75 in early 2018.

Regardless of your credit standing, even if you have an 820 credit score, the best way to deal with credit card interest rates is to avoid them. Pay off your balance each month and avoid steep credit card interest rates.

Verify your new rate (Aug 21st, 2018)