Believe it or not, your credit score carries significant weight. It can determine your job prospects, the amount you pay in interest over a loan’s lifespan, and may even block your eligibility for a loan. Since the Great Recession and housing market downturn, getting a loan has become increasingly difficult. A FICO score of 650, previously deemed harmless for borrowing, might now pose a problem.
The Fair Isaac Corporation, developer of the FICO score, determines FICO ratings from 300 to 850. A 2009 report disclosed that over 58% of US scores were 700 or higher, with only 15% of Americans clocking in at 650. Astonishingly, just 27% have scores of 649 or below.
How a 650 Score Impacts What You Pay On Loans
For individuals with a FICO score ranging between 650 and 699, they’re regarded as moderate credit risks. Consequently, they will likely face higher interest rates than those with scores exceeding 700. Over the duration of a car loan, this could mean paying hundreds of dollars more in interest; for a home loan, the added costs could quickly run into the thousands.
Finance journalist Liz Pulliam-Weston reveals this in her article “Lifetime Cost of Bad Credit: $201,712.” She contrasts two friends who have identical financial behaviors over 40 years, but differ in their credit scores: one at 750 and the other at 650. In Pulliam-Weston’s example, the friend with a 750 FICO score pays 10.99% on her credit cards. In contrast, the friend with a 650 score coughs up 19.99% in interest. With such high rates, it becomes challenging to make payments on the principal and rapidly reduce the debt if only minimum payments or slightly more are being made. Even more strikingly, on a 30-year, $400,000 mortgage, the friend with a lower credit score ends up paying $73,217 more in interest compared to her counterpart with a higher credit score.
The Silver Lining of a 650 Credit Score
Having a 650 credit score isn’t all doom and gloom. You’re not too far away from 700 – a rating considered a low-risk credit score. With some dedication and tactical maneuvers, you could elevate your score above 700, entering the 58% of Americans enjoying lower-risk credit profiles and subsequently lower interest rates.
Steps to Enhance Your Credit Score
Educate yourself by reading insightful write-ups such as “How to Improve Your Credit Score.” Check your credit scores for free online and keep track of improvements in your score due to steps you’ve taken. In today’s economy, a credit score of 650 can be a significant hindrance, but with dedication and strategic planning, you can join the ranks of those with ratings above 700 and enjoy lower interest rates. It’s time to bolster that score before your next big purchase.
Image Source: howtofixmycreditscore.org
