Like it or not, your credit score can affect where you are hired, how much money you pay in interest over the course of a loan and whether or not you can even qualify for a loan. Since the start of the Great Recession and the housing market downturn, it is increasingly difficult to even obtain a loan. While a FICO score of 650 may have been a score that did not hinder your borrowing ability in years past, now it just might.
The Fair Isaac Corporation, creator of the FICO score, offers a range of FICO scores from 300 to 850. As recently as 2009, FICO stated that over 58% of scores in the United States are 700 or higher. Only 15% of the U.S. population has a credit score of 650. A mere 27% of Americans have scores of 649 or lower.
How a 650 Score Can Affect What You Pay on Loans
In fact, a FICO score between 699 and 650 marks you as a moderate credit risk, and you can expect to pay higher interest rates than those with scores above 700, which is the dividing line for lenders between low credit risk and moderate credit risk candidates. Why is this important? Over the life of a car loan, you may pay hundreds of dollars more in interest. Over the course of a home loan, you could easily pay thousands of dollars more.
Liz Pulliam-Weston of MSN demonstrates this in a post, Lifetime Cost of Bad Credit $201, 712. She compares two friends who behave identically financially in terms of the debt they carry over the course of 40 years, but one has a credit score of 750 and the other has a credit score of 650. In her examples, Emily, the friend with a FICO score of 750 pays 10.99% on her credit cards while Karen, the friend with a 650 credit score, pays 19.99% interest. At that rate, it is harder to make payments on the principal and pay down the debt quickly if you are only paying the minimum or slightly above the minimum. Even more shocking, on a 30 year mortgage for $400,000, Emily pays 4.84% interest and pays $359,004 in interest over the life of the loan, while Karen pays 5.66% interest, which doesn’t sound like a dramatic increase, but over the life of the loan, she pays $432,221, a difference of $73,217 compared to what Emily pays with a 100 point higher credit score.
The Good News about a 650 Credit Score
The good news about having a credit score of 650 is that you are not that far away from the cusp of what constitutes low risk credit, a score of 700. If you make a conscious effort to improve your credit score, you may be able to get it up over 700 and join the 58% of the American population that has low risk credit and access to lower interest rates.
Steps to Take to Improve Your Credit Score
- Read articles such as How to Improve Your Credit Score to learn the basics of what comprises a good credit score and how to achieve it yourself.
- Get free credit scores online and monitor how your score is improving with the steps you are taking.
A score of 650, while once not a serious hindrance, has become one in this current economy. However, there are steps you can take to improve your credit score and begin to benefit from lower interest rates available to those with credit scores of 700 or above. Now is the time to improve your score, before any large purchase.
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